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Private Credit 

Shubham Saharan

These days, it seems like the one thing asset managers can’t get enough of is private credit. And it makes sense: private credit has been raking in billions since the global financial crisis.

Pension funds, insurance companies, sovereign wealth funds, foundations, and a smattering of other LPs have flocked to private markets, where returns beat out public markets —whether equity, credit, infrastructure, or real estate.

By some metrics, the size of the industry has ballooned to $1.7trn. So it’s no surprise that other parties are trying to get in on the market as well, namely some high profile hedge funds.

Take for example Daniel Loeb’s Third Point, which is planning to launch its first private credit, according to 9fin. That fund, which is set to launch later this year, will focus on direct lending to corporate borrowers.

It’s a follow through on Loeb’s previous promise, as he reportedly wrote to investors earlier this year that the firm would be “adding private credit as a complement to [their] existing strategies and expect to begin investing in this new sector in the next few months.”

In another corner of the market, 9fin also reported that hedge fund Viking Global Investors has made a move into private credit. The firm has organized a private credit team focused on direct lending, and already amassed more than $700m, including leverage, for the strategy. Viking will look to provide debt financing to both sponsored and non-sponsored middle market companies.

And it’s not just new entrants that are looking for a way into the market, established direct lenders are also aiming to beef up their private credit arms. For instance, JPMorgan Chase, per Bloomberg, is looking to bolster its alternatives business by buying another private credit firm.

Is the private credit market too crowded? The hedge funds don’t seem to think so. But if the decision by the Louisiana State Police Retirement System to eliminate its hedge fund allocation and boost its private credit exposure is indicative of a trend, it makes the situation much clearer than the move into private credit is a necessary one if LPs are going to move out of hedge funds.

Still, investing in middle market companies is not without its challenges, and hedge funds can’t just short their positions like they could in public markets when a portfolio company’s revenue suddenly plummets.

But they may be able to begin to do in private credit what they do best: trade.

Until recently there were very few options for firms to get out of credits, besides a sale of the business or refinancing. Behind the scenes, however, there is an emerging solution for lenders — a steadily developing secondary trading market for individual private credit loans, as we reported earlier this week.

While it’s still a relatively nascent market, it’s one that’s quickly growing and expanding. Just over a year ago, opportunities in the secondary market would come up about once a month, and often for loans worth around $25m. But today, buyers say that they see deals on a weekly basis, and that the amounts on offer are regularly more than $150m.

Some buyers have even told us that these strategies comprise about half of their credit investment activity, allowing them to scoop up individual loans for discounts typically ranging from 75-90 cents on the dollar, depending on standard considerations such as borrower quality and the coupon on the loan.

Since the end of last year, direct lending-backed companies have undertaken a number of restructurings. Those workouts are now becoming more frequent as interest rates remain high and companies attempt to navigate upcoming debt maturities and a cash crunch. We hear it’s definitely happening.

These deals are done in back rooms with on a need to know basis, rather than a court room. But we recently learned that Specialty Dental Brands has been taken over by its lenders.

The story begins in 2022. Private equity firms TSG and Leon Capital acquired dental support organization Specialty Dental Brands in at a TEV of $2bn with a 13.3x purchase multiple, and EBITDA around $150m. Less than two years later, 9fin reported that lenders have taken over Specialty Dental Brands after the company struggled to contend with spiraling costs related to its acquisition strategy.

The lenders who now own the company are Pinebridge, Goldman Sachs, Maranon, and Comvest, the sources said. TSG and Leon Capital have walked away from the company, and allowed for a consensual restructuring.

Lenders at Specialty Dental’s holding company have exchanged the company’s outstanding debt for equity at the holdco level and have taken control of the company’s board. The remaining balance of the existing loans will be termed out, with some of the facility carrying an interest rate to be paid in cash, and the rest structured as a PIK. The loan will mature in March 2027.

A consensual restructuring suggests maybe the direct lending model works. Many will say they’re not in the loan-to-own business, but they are prepared to take over a company should the situation arise.

While the direct lender approach to restructuring means less transparency than the syndicated market, there is less friction for the parties involved. Unlike BSL investors, private credit firms may get along better.

As Ken Kencel, president and CEO at Churchill said on a panel at the recent DealCatalyst conference: “We like each other.”

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