These types of financings are increasing in private credit circles, according to 9fin sources. In fact, this month lenders including Blackstone and Blue Owl arranged a roughly $2 billion financing package for GTCR and Charlesbank Capital Partners-backed data center firm Park Place Technologies, a portion of which will support a dividend.

While dividend recaps allow for a competitive edge as lenders look to fend off advances from the BSL market, the practice has its pitfalls. Dividend recaps increase leverage, making the borrower’s position more precarious should growth expectations fall short.

Private equity firms have plenty of incentive to go down the dividend recap route. The pressure is on to make pay outs to LPs. NAV lending was the story of 2023, but dividend recaps are an alternative route to liquidity.

There is still hope the LBO market comes back — green shoots are starting to poke their head out — in the mean time, this might be the best option to keep putting capital to work.

Illiquidity premium, reimagined

Private credit is often considered a relatively illiquid asset class, but several players in the growing secondaries market are working towards changing that.

Earlier this week, 9fin spoke with Brian Laureano, CIO of credit secondary specialist FoxPath Capital Partners, about some of the dynamics driving fund secondaries activity this year, including the consistent need for LP liquidity in a tepid M&A market.

That need inspires the most deal flow. LP-led deals still comprise the majority of transactions, but Laureano says that GP-led activity is picking up, accounting for roughly 40% of the opportunities that his team has seen in the last few months.

These transactions often involve ‘strip sales’ — selling a percentage of a fund’s underlying assets to a new fund under the same manager — which can help GPs boost their capacity for deployment. But they can also look more similar to a continuation fund in situations driven by a need for distributions or a strategy shift. Laureano believes that the increased adoption of GP-leds will be a significant contributor the growth of the secondaries market, as it was in PE secondaries.

A part of tapping that growth potential will involve educating the broader investor ecosystem on the asset class. A job that remains unfinished, says Laureano, particularly when it comes to credit GPs. As managers become more comfortable and familiar with secondaries transactions and their accompanying dynamics, the opportunity set will grow even more.

Rates uncertainty

After inflation rose in March, much to the shock of the market, now there’s real sentiment that rate cuts won’t come at all this year.

There was an expectation 150bps would come off the Federal Funds Rate (which has been effectively over 5.3% for the whole of 2024 so far) this year. New expectations are the first cuts might come as late as March 2025.

Default rates had remained low in private credit, but coverage ratios have been tightening. How long do we havebefore the situation worsens for borrowers?

PIK activity continues to rise as things get precarious in portfolios. Some sponsors are also employing DDTLs as part of the capital stack to help cover costs. All the tools in the toolbox are being used as we even see restructuring taking place behind the scenes in order to stave off the dreaded ‘default’.

But in the meantime, however, double digit yields on senior secured debt means things are not all that bad for private credit firms.

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