As our Q1 24 review already highlighted, private credit deal flow was down 18% from 2023’s last quarter, and market sentiment for Q2 suggests most lenders’ pipelines are sputtering at best.

“There have been a few moments this year where activity seemed to be really picking up with a flurry of deals,” one direct lender said. “But then things fizzle out quickly and you’re left scraping the bottom of the barrel again.”

As another lender told 9fin in our M&A analysis this week: “The deals now are either too small, too big, too bad, or too competitive.”

And what do sponsors and lenders do with their twitchy feet when deal flow isn’t there to preoccupy them? They start looking inwards at their own portfolios, of course.

To reprice or refinance?

Since 9fin’s February coverage of KKR and Macquarie lowering the margin on Facile’s debt from 600bps to 500bps — the first reported private credit repricing of 2024 — the market has been inundated with a wave of repricings as sponsors look for a better deal and direct lenders look to hold on to their assets.

“The incentive to reprice works both ways, which is why it seems to have taken the market by storm these past few months,” one source said. “Private equity sponsors want cheaper debt for their companies, obviously, and lenders know that if they don’t meet demands, everything in their portfolio could reprice elsewhere.”

The threat comes from the reanimated syndicated markets and the pricing premium that banks can offer. Thus far this year, 9fin data has flagged 12 formerly private credit-backed businesses that have refinanced in the BSL market, the latest being Advania which just priced this week and QSRP which currently sits in-market.

YTD private credit to BSL refinancings (Source: 9fin)

“For a lot of these larger companies with a track record in the syndicated space, it doesn’t make sense to stay on in private credit,” one banker said. “It was a blip in the system from when the loan market was closed, the situation is just recalibrating itself now.”

Regardless of why, such pricing puts pressure on private creditors to fall in line. In April, 9fin covered Civica repricing its debt down 75bps ahead of Blackstone acquiring the software provider from Partners Group. This month, we reported on International Schools Partnership shaving 50bps to 100bps off a number of its loans with direct lenders.

9fin sources tell us such repricings are happening across the board, with price talks typically settling around the “low-to-mid 500bps mark,” according to several lenders.

Fidelity drops out as fund consolidation continues

Following the March exodus of Barings’ senior leadership, it was only a short respite before more team news rocked the industry. Fidelity International laid off 30 members of staff last week as part of a decision to abandon its European direct lending strategy.

The first fund to take its foot off the gas on the gilded highway to private credit utopia — does that mark a sad day, or a much-needed reality check?

Fidelity’s decision, which 9fin sources said was based largely on fundraising struggles, speaks to a wider trend shaping the industry — the concentration of capital around the most established managers.

Although the total amount of capital raised across private markets has remained steady year-on-year, the total fund count has shrunk by 46%, with the majority of that capital landing in the hands of funds valued at more than $1bn, Pitchbook data for Q1 2024 shows.

In a recent press lunch, Anthony Fobel, founder and CEO of Arcmont, said: “I don't think there is any room in the market right now for small independent players and you've seen the direction in which the asset class is heading.”

“The top five managers now account for 33% of all the capital in the European market, and it’s the same with the top five in the US. My guess is that in three years’ time, that is going to be 50%.”

Still, Fidelity’s retreat from direct lending is an eye-opener — with just under $820bn in AUM, if Fidelity could not crack direct lending, what chance do the small independents have?

This flight to quality has been ongoing for some time, but Fidelity’s U-turn serves as a signpost that the shift is no longer some ethereal talking point; it’s starting to have a tangible impact on the market.

European private credit pipeline

This week has seen several processes kick off across the UK and Germany, most notably the sale of German property software firm Aareon Group, which could make for one of the largest private credit-backed LBOs of the year if direct lenders can win the debt. The sale is being marketed off €150m of EBITDA and a €2bn enterprise value.

For the full run down on all the in-market deals in our pipeline, email subscriptions@9fin.com.