Meanwhile, the holidays are upon us — the season of excess! But too much of anything is not a good thing, whether that is turkey, mulled wine, and as one California pension fund indicates, private credit.

So the dieting begins early for Tulane County Employees’ Retirement Association, which is refraining from further private credit investments now and into 2025. Private credit currently makes up 6.7% of the portfolio — above the 5% target, 9fin’s Anna Russi reports.

It goes against the tide of reports we receive here at 9fin showing investors bullish on private credit. But Tulane’s dilemma doesn’t necessarily paint a trend of disenchantment among LPs (if anything the opposite if they’ve leaned in too far!).

With that being said, there is a quiet murmuring behind the scenes among some LPs. Speaking to one source, it is the continued compression in spreads that is top of mind for concerned investors. As more and more deals breach the SOFR+500bps mark, the amount of overall yield generated becomes a focus, especially if base rates come down at the speed many expect.

Triumvirate Environmental, for instance, is on the block, marketed at an LTM EBITDA of $100m. Lenders are pitching pricing in the SOFR+475bps area for financing of the provider of hazardous waster management services. Another example from last month was Imagine360’s $700m dividend recap, which priced at SOFR+500bps — on the edge, but for a use of proceeds, which LPs are not typically fond of.

Speaking of excess, bids are reaching frothy levels for Frazier & Deeter, a $20m EBITDA accountancy services firm. 9fin reports valuations are coming in around 15x the company’s EBITDA, resulting in concerns from some lenders about demand for extra leverage to fund the transaction.

Bidders like the company because it fits neatly into the buy-and-build strategy that is the bread-and-butter of the private equity industry. As our colleagues in Europe write, accountancy firms are a hugely popular sector for sponsors and direct lenders alike. Roll up a number of independent operators, smooth out the operations, and then watch that EBITDA go up and up.

Concerns about the risk of private credit is nothing new (just ask the IMF, Elizabeth Warren, and most recently the ECB), but if the battle for assets means investors are not getting their risk-adjusted-returns, then there may be more than just trimming excess fat when investors come to reconsider where to allocate cash in the year to come.

BDCs mix it up

Some BDCs found themselves in a bit of a sticky wicket earlier this month. Some hosted calls mere hours after the US presidential election was settled in Donald Trump’s favor, thus forced into cobbling together an opinion on what is going to happen over the next four years.

There is likely to be little change in the trajectory of rates, which after finally seeing the first rate cut in four years recently, are expected to go down further. As we discussed in our report on the potential impact of a Trump presidency, this might help to grease the wheels of M&A.

But it wasn’t geopolitics that was solely on the mind of BDC executives. Some of the larger firms are migrating towards smaller companies in order to escape banks’ presence. Half the companies Blackstone financed had an EBITDA below $100m. Ares, too, in its acquisition of The Riverside Company is trying to make a splash into the non-sponsored market.

A $100m EBITDA company is still considered on the large size, but to go downwards in the market may mean it is slower to deploy the huge amounts of capital raised by such private credit titans. Loan sizes are ultimately smaller, so that pressure to move cash out the door gets harder, plus sourcing becomes a trickier question — it’s not a quick task to the due diligence on a company with outdated HR and payroll software.

A consolation for lenders is that spreads have begun to widen out after a summer crunch. With that, as Alex Chi, co-CEO of Goldman Sachs BDC, said that should help the “the pace of repricing slow down”.

So a mixed quarter for BDCs overall, yet optimism remains. The lenders are bullish on the future M&A pipeline. But we’ve already heard that sentiment — again and again and again.

This week in 9fin

JP Morgan and Goldman prep loan sale to finance purchase of Honeywell’s PPE unit

CA-based pension fund to hold back on private credit investment

Ohio pension fund increases private credit allocation

Frazier & Deeter fetches bids as high as 15x EV

Five takeaways from Q3 BDC earnings

What’s in market

Frazier & Deeter fetches bids as high as 15x EV — the accountancy firm is being marketed on a $20m LTM EBITDA and is proving to be a popular asset as sponsors are bidding up to 15x

JP Morgan and Goldman prep loan sale to finance purchase of Honeywell’s PPE unit — while banks are taking care of the debt financing, a separate $400m preferred equity tranche seems perfectly suited for a private credit firm

Triumvirate Environmental — the waste management services company is in talks with direct lenders to fund a potential sale, which is looking to close at a 13x multiple of its $100 EBITDA. Raymond James has been hired to run the process

Sizzling Platter — UBS is advising on the proposed sale of the CapitalSpring-owned restaurant franchisee. The company generates a $150m EBITDA

Encylcopedia Britannica — Bank of America has been brought on to advise on the sale of the $40m-plus EBITDA company.

Accupac — owner Palladium Equity Partners has tapped Piper Sandler to explore a $200m refinancing for the cosmetic contract development company

Midwest Transit Equipment — the BrightWater-backed distributor of new and used buses is exploring a sale with the help of investment bank Harris Williams

Lycra — The spandex maker is approaching opportunistic credit funds for a $350m debt deal, to partly refinance the company’s existing facilities

Amerit Fleet Solutions — the Brightstar-backed maintenance provider for delivery vehicles is exploring a potential sale with the help of advisors Moelis & Company

From around the web

ECB’s McCaul Says Some Private Credit Firms Appear ‘Systemic’ (BBG)

Vista Closes $460 Million Deal to Cash Out Credit Investors (WSJ)

Banks and private credit: best of frenemies? (FT)

Asset-based finance the next big thing in private credit, KKR’s Daniel Pietrzak says (P&I)

The Unicrunch is our US private credit newsletter, in which we break down everything from unitranches to ABL. Find out more about 9fin for private credit here.