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Private Credit 

David Brooke

This article is part of our forthcoming service, 9fin Private Credit. Content from this new service is currently available as a preview to all 9fin Premium subscribers, but will soon require a subscription to 9fin Private Credit to view. For more info on this product and the accompanying database, contact subscriptions@9fin.com

It’s easy to forget that not so long ago the New York sky was orange for a few days, when wildfires in Canada spread to the Big Apple. That was soon followed by a wave of extreme weather in both the US and Europe.

Even if it feels like the national political conversation is skirting the issue of climate change to some extent, the private capital markets are firmly onboard with widespread attempts to decarbonize the economy. Environmental, social and governance (ESG) soldiers on, despite a political backlash in some parts of the US.

Both LPs and GPs are walking hand in hand on the issue. Blackstone announced last week that it had raised the princely sum of $7bn for an “energy transition credit fund”, just 18 months after officially announcing the launch of the strategy. The fund aims to aid the transition towards renewable energy by financing projects and companies that promote the process.

Few private credit firms raise funds with such a narrow focus. You can count the technology-focused funds on one hand, with those managed by Vista Credit Partners and Blue Owl as the big names. And SLR Capital Partnersmanages a fund providing healthcare loans. Otherwise, lenders will focus on raising cash that focuses on certain parts of the capital structure — while, of course, predominantly targeting healthcare and tech.

Early records of the history of ESG in private markets will point to LPs as playing the driving role. Indeed, a report from the financial consultancy firm Malk Partners found that 98% of managers of private equity, private credit and venture capital funds had said it was LPs that drove their adoption of ESG policies.

Nevertheless, we’re here now. Private credit firms on both sides of the Atlantic are underwriting sustainability-linked loans, hiring ESG officers to oversee strategies and screening assets. Go to any private credit conference and there will be a discussion dedicated to ESG. 

But a market that celebrates itself will be met with skepticism from outsiders. Because of the opaque nature of private credit, it can be hard to make an assessment of whether lenders are doing enough. A margin ratchet that only goes down but not up may not have the bite needed for the borrower to hit targets. And targets, of course, have to be both relevant and a challenge. 

Alternatively, lenders could ask for the inclusion of a covenant in the documentation that calls an event of default should the sponsor not hit its KPIs — but we’re not there yet, according to this 9fin report.

It’s fair to say the lender’s role is limited in ensuring borrowers’ sustainability. Lenders can pick and choose the assets they finance, but up until the last 18 months it was sponsors that had the upper hand. Lenders have had to compete with each other. 

It is also the sponsor that owns the firm and can make the operational changes. But one reason for optimism regarding sponsors’ attitudes is that they too have LPs challenging them to be making their investments more sustainable. 

Yet with lenders having a stronger hand today, it may still be pricing, leverage and other covenants that are the focus of the negotiation — and ESG metrics take a back seat.

“For KPIs and other sustainability-linked measures, it hasn’t made it to the level of ‘we need to have this or we’re not going to do the deal’. It’s not yet a deal breaker,” said Ryan Kim, a special situations and private credit partner at Akin who advises credit funds and asset managers deploying capital.

The long running drama of Finastra’s debt came to an end this week. The business software company owned by Vista Equity Partners was staring at billions of dollars in maturities next year yet pulled off its refinancing in the private credit market, according to a Bloomberg report — but not before kicking in $1bn of preferred equity. The company also achieved $39m in annualized cost reductions, according to 9fin’s report on its recent earnings.

The unitranche is a hefty $4.8bn loan, which likely makes it the biggest private credit facility (superlatives have to be caveated in the opaque private credit world lest a bigger loan is out there) on record. Certainly chunky, but a previous version of this column mused that a $10bn unitranche is doable in this market.

When the next huge private loan comes is unclear, but market capacity suggests more are on the way. New Relic’s recent $2bn-plus facility is unlikely to stand out for too long.

The Unicrunch is our US private credit newsletter, in which we break down everything from unitranches to ABL lending. Sign up here for the inside track on this fast-growing market.

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