And needless to say, in this private market there are likely many more names out there that did not change hands after launching a sale.

It is not all doom and gloom: Waud Capital Partners portfolio company Health & Safety Institute seemed destined to be added to this list of broken sale processes, but ultimately it secured a minority investment and loan from Neuberger Berman. PE firms don’t generally view minority sales as a home run, but it’s still a deal!

Elsewhere, Potter Electric recently completed a sale to KKR (we reported in October that the company was up for sale, marketing itself on $60m of EBITDA). 

Essentially, it’s clear that the appetite for deals is there, and that cash is also abundant — but the planets have to align pretty much perfectly.

Market dynamics suggest this cannot continue, however. Preqin estimates there is almost $500bn sitting on the sidelines in the global private credit market and ready to be put to work. Quite where is unclear, although a recent Jefferies survey of healthcare dealmakers showed there is optimism that M&A activity will pick up in the New Year.

Looking back, this has been a year of waxing and waning for private credit market. When sponsor-to-sponsor sales became less frequent, many lenders found opportunities in take-privates, like financing the spin-out of Baxter’s biopharmaceutical unit (now known as Simtra) or the buyout of New Relic.

Private equity is in a similar jam: globally, the industry has well over $2bn in dry powder. Such a figure that dwarfs private credit uncommitted capital bodes well for lenders — but if buyout firms can’t complete more deals, then they will continue looking inward, towards their existing portfolios, for new loans.

Oversight

As private credit balloons, the question of regulation is only to going to become louder. Speakers from the largest private credit firms addressed this topic with an air of inevitability at a DealCatalyst private credit event in April.

After a few months of endless headlines about banks making their way into the space (whether lending themselves or partnering up with existing private credit firms — more on this dynamic here) the call for regulation is getting stronger.

Just this week, Sherrod Brown, who chairs the Senate committee on banking, housing and urban affairs, voiced concerns about “insufficient insight” among governmental organizations into private credit lending activity.

He wrote:

Private credit has developed significant interconnections with the banking system…These linkages may pose hidden dangers to the banking system, especially as most of the private credit market has not endured a full economic cycle with elevated defaults rates. Given the sector’s expectations of rapid growth, these risks are already increasing as private credit fund managers continue to collect cash and deploy it on riskier deals.

The letter went on to request that the heads of the OCC, FDIC and Federal Reserve provide a risk analysis of the private credit industry, evaluate their visibility into the market, and explain how these bodies are working together to monitor any associated risks to the banking sector.

The focus so far appears to be on what regulators are doing to stay on top of recent developments in private credit and assess any resultant risks — and of course that is welcome. But what could that translate to in the future? More reporting requirements for funds? Something akin to the leveraged lending guidelines introduced for banks after the 2008 crisis?

It’s unclear. And for a sector that is notoriously private, regulators are on the back foot if they’re trying to figure out whether lenders are acting recklessly or responsibly. But as that oft-quoted market size figure of $1.6trn keeps going up, questions of systemic risk will intensify. 

So it’s good to ask the question now: how will regulators tame the growing beast of private credit?