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Private Credit 

Shubham Saharan

Private credit’s golden age has long been debated. Are we still in it or is it now over?

Whether or not there’s an agreement to the answer of those questions, one thing is certain is that there’s no stopping new entrants trying to get access to the market. Banks, large asset managers, and today hedge funds are looking for a route in. The question is: can they find one?

In the last few months alone, 9fin reported that Third Point is looking to raise its first direct lending fund, Viking Global has founded a private credit team, and Millennium Management is also exploring building out its own private credit arm.

The difference in these examples is that the firms are using their own in-house capabilities to operate the strategy. It’s an alternative option from buying an existing player, which Man Group did in its acquisition of Varagon last year.

These are firms with big names in the hedge fund world, but does that translate into middle market lending?

What’s in a name? Well, in private credit it turns out quite a lot. While there’s some areas of the market with room to cash in on private credit’s lofty returns, it’s only getting harder to make a name for yourself within the asset class.

Especially in the vanilla direct lending market, where deals are more scarce, every manager is chasing after the same assets, and increasingly offering them at a discount to years past. It’s almost a commoditized market.

And without size, LP support, and a healthy track record, it’s going to be hard for new entrants to make inroads. Although if you can find a sympathetic Abu Dhabi royal to support your cause then that can somewhat help a firm overcome these barriers to entry.

Granted, there’s always the alternative, at least in the beginning of building a business, of simply buying loans that other firms have already originated via the growing secondary market. But even that option seems to be less likely, as some market participants have noted that such secondary transactions are happening less frequently now, as private credit lenders are eager to keep hard-fought deals on their own books.

In any case, many of these platforms are in a nascent stages of their development, and have a large market to explore. As one director at an asset management firm said: “It’ll be interesting to see how they build out their platform.” We at 9fin will check back in later on the hedge funds.

Earlier this year, there were headlines galore about banks storming back to the loan market to reclaim territory they lost to direct lenders, fueled by a rich appetite from CLO issuers clamoring for new deals.

In order to beat out private credit firms and seduce sponsors their way, banks offered looser docs and tighter pricing. It’s already worked in their favor across a myriad of scenarios: take the $5bn loan deal for Cotiviti, the $1.6bn financing package put together for Crash Champions, and the deal for Wood Mackenzie.

Still, it’s not all going one way. There’s still plenty of companies for which private credit is a more appropriate and flexible solution and those non-bank lenders continue to find creative ways to undermine the bank domination narrative.

For an example see 8th Avenue Food & Provisions. 9fin reported earlier this week that the company is looking to tap the private credit market as the maturity on some of its existing debt is due to expire next year. The company is looking for roughly $800m in privately placed debt.

The move to the private credit market came after the company pre-marketed a deal to investors in the broadly syndicated loan market via Barclays. That process has since been halted following as there was seemingly little appetite for this food packaging company.

The other avenue private credit firms are taking to fend off advances from the syndicated market is slashing coupons on existing debt facilities.

A rally in credit markets has caused a wave of repricing activity in broadly syndicated loan markets, and private credit funds have been forced to respond in kind by offering tighter spreads to compete.

The latest example of this is for middle-market insurance agency Higginbotham, which is asking direct lenders to lower the coupon on the company’s term loan debt by 100bps.

If completed, that repricing would bring pricing on the company’s roughly $1.6bn in term loan debt down to SOFR+450bps from SOFR+550bps. You may remember Higginbotham earlier this year issuing a $475m DDTL to cover an interest payment.

Another recent example of such price compression includes a price reduction enacted for a portion of Carlyle-backed Acentra Health.

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