Of course 2022 was a happier time for direct lenders. When the bank market shut down it was no longer private credit just taking the banks’ lunch, but their breakfast and dinner too! Late last year, private credit managers were even joking about taking 100% market share.

But conditions are different now, and when dealflow is more limited in a tricky macro environment, origination is about repetition as much as it is about expansion. Familiarity is your friend when it comes to lenders (and lawyers!) earning repeat business when sponsors take advantage of add-ons and delayed draw facilities after an LBO.

American Equipment Holdings will be an interesting situation to follow, with that in mind. As 9fin reported earlier this week, the company is on the block after more than two years in the hands of private equity firm Rotunda Capital Partners. Over that time, the crane and hoist services provider made 14 acquisitions as of January this year with the backing of direct lenders Kayne Anderson and Twin Brook.

Stick around

Of course, a big risk for direct lenders is if the sponsor decides to lean on the bank market to refinance a prized asset, if it has grown large enough. 

But that pivot to syndicated debt is no longer as obvious as it used to be. Now that the largest funds can rival the size of bank deals — without the flex risk — the private credit market has much greater capacity to fund companies for longer. Given the volatility in broadly syndicated debt in recent months, owners may be inclined to go with the devil they know. 

Another case in point: Goldman Sachs BDC’s third quarter earnings call last week revealed the lender had backed a deal for Rubrik, a data security cyber company, to refinance debt and provide funding for the company’s acquisition of Israel-headquartered Laminar Securities. The spread has remained the same at SOFR+700bps, but maturity has now been pushed out to 2028, according to filings. 

Sometimes there’s a benefit to staying in the game a little longer, as NBA veteran and Rubrik investor Kevin Durant would no doubt testify. As well as benefiting from being rolled into the next deal, re-underwriting the credit is a little easier when the sponsor remains the same.

There was another similar situation last week as Blackstone Credit continued its backing of Guidehouse, a business consultancy firm, as it was sold by Veritas Capital to Bain Capital for $5.3bn. A $2.85bn debt package that was put in place in 2021 and led by the lending behemoth remained in place.

Concentration

So bigger is perhaps better, which is the direction the private credit market is heading in as some of the giants of the game account for a growing majority of deals. Estimates from the trade body AIMA said there has been $333bn in deal volume last year, globally, of which 58% was provided by those lenders who invest more than $10bn per year, on average.

Very few private credit firms reach the $10bn level of dealmaking. To deploy that level of cash, those firms are increasingly investing in companies at the larger end of the middle market, typically defined as companies generating more than $75m EBITDA per year, as well as bigger assets that previously might have been reserved for the banks, such as Finastra or New Relic. 

Others, however, have stuck to their knitting by raising modest funds and providing loans to companies with EBITDA below the $75m mark. While bigger deals often grab more headlines, it is the likes of American Equipment ($37m EBITDA) or Fenix Parts ($40m-$50m EBITDA) that have historically made up the backbone of private credit activity.

So, does that 58% figure point to a widening gap between the largest and smallest asset managers?

The gap may increase as companies deal with the fallout of high interest rates. Larger firms have the resources to tackle difficult credits with restructuring experts — while also staying on the offensive with big origination teams. Those further down the ladder with fewer resources to deal with defaults may feel more pain from “higher for longer”.

Still, it hasn’t halted lenders large and small from hitting the fundraising trail. The cash raising juggernaut Blackstone reached $8bn on a first close for its latest direct lending fund, Bloomberg reported, while at the other end of the market Benefit Street Partners is aiming to close on $2.5bn for its fifth direct lending fund.