The Unicrunch — Private credit searches for post-holiday M&A spark

Peter Benson

5 July 2024•6 min read

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Perhaps the holiday felt a little different without Joey Chestnut being crowned hot dog eating champion down in Coney Island, but then there are few things about this year that don’t feel normal. Particularly in private credit.

For as the last of the burgers are fed to the dog and the smoke of the fireworks dissipates, the time is a good one to look back at the first half of the year and what guidance it can give to our expectations for the second half.

Deals and no deals

Last year failed to provide the M&A financing opportunities for private credit lenders. But the hope that this year would be better soon evaporated. While 9fin reported on a smattering of deals in January and February, there was not a lot of M&A for lenders to get their teeth into.

For instance, Sixth Street and CVC backed Bridgepoint’s move of PEI Group into one of its other funds to kick off the new year. But the movement of the asset into the large cap fund followed attempts by Bridgepoint to find an outside buyer. It turns out only Bridgepoint could offer the right price.

But the pressure was on to get deals done. In February, A $1.2bn refinancing package to software company Granicus provided by Antares and Oak Hill brought some relief for lenders to deploy capital, pricing at SOFR+525bps.

While few and far between, LBOs did arrive in the following months, but more a trickle than a flood. Financings for Prometheus, RevSpring, Avetta, and Ora Clinical all provided much relief for a market starved of funding M&A.

It was, however, in the core and lower middle market where the M&A opportunities were. Churchill led a $155m facility for Investcorp’s acquisition of Best In Class Technology. Invesco led provided a small loan to Associated Spring’s carveout. Sale processes like Pediatric Home Service and Barclay Water attracted a lot of attention from buyers and direct lenders.

Still, we talk a lot of records being broken in private credit and Blackstone may have just achieved that in leading a $7.5bn facility provided to CoreWeave, an AI hyperscaler, in what is understood to be the largest private credit deal on record.

Having fun raising

Meanwhile, the first half of the year showed there was little appetite for private credit among LPs, as the sluggish numbers reported by Preqin showed. Just $33bn was raised globally in the first half of the year, and it appeared it would be another downward slump in the annual figures. Direct lenders raised $210bn in all of 2023, down from $215bn in 2022, and $242bn in 2021, which was the record aggregate amount raised for the market.

But that picture appears to be already changing as we enter the second half of the year. LP allocations to the asset class have been climbing (even in spite of it being expensive) and early year allocations reflected that.

Indeed, some funds are aiming for new highs. Both Ares and HPS are close to, or have closed, $20bn funds dedicated to private credit. Goldman Sachs, too, hit $13bn — and it led to us at 9fin to ask what was the attraction of big funds.

Elsewhere, Platinum Equity is out there with its own credit fund, as is Comvest, Thoma Bravo, and Audax. The fundraising figures for the second half of the year certainly look promising.

And private credit continues to find niches. Ares is looking to raise $1.5bn for healthcare investments. Other strategies outside the traditional sponsor-backed direct lending space are mainly opportunistic and asset-backed funds, the former of which are plentiful in the market. Victory Park’s raise targeting $2.5bn for opportunistic ABL and Castlelake looking to raise $1.5bn to invest in asset-based lending broadly are two such examples.

Terra infirma

It’s a year ultimately of instability, as multiple elections have proven (or yet to prove). And markets are constantly readying themselves for whatever move the Fed makes.

And as executives at Barings found out this year — sometimes the ground beneath your feet can collapse over night. The mass exodus in March of its private credit team to Corinthia sent shockwaves across the market.

The ensuing fallout covered by 9fin included an overhaul of its remaining leadership, a potential suspension of its private credit funds (including one that was in market), and a lawsuit against a new firm that formed consisting of the leaving cohort of executives.

The thesis of private credit being a relationship driven business is increasingly being tested these days. As many at Corinthia will find out slowly whether the relationships built over the years with sponsors carry over into their new business.

Lenders are also having to re-examine relationships with sponsors. This year has seen what is regarded as the first LME in the private credit market. At the end of May, Vista-backed Pluralsight began exploring a transaction in which it would move a material IP asset to a non-guarantor subsidiary outside its restricted group, and then raise debt on the new asset.

The company has since started restructuring talks with its lenders, that include Blue Owl, Goldman Sachs, Golub, BlackRock, Ares, and Oaktree, according to filings. This week, Vista began talks to hand the company to lenders, according to a report in Reuters.

In other instances, lenders are being pushed into taking the keys of companies. We saw a private credit deal go that way a few months back, as a lender group that included Pinebridge, Goldman Sachs, Maranon, and Comvest took control of Specialty Dental Brands after the company struggled to keep up with rising costs.

So, if the second half of the year is anything like the first, a continuation of the fireworks and the festivities could be on the cards.

This week in 9fin

Private credit M&A bolt-on tracker — June 2024

Private credit lenders back Inspira’s $2.2bn refi

Illinois pension fund commits $135m to private credit

What’s in market

Wastequip — the company is looking to refinance its existing public debt facilities in the private credit market

Priority Power — the energy management services company is on the block with an $85m LTM EBITDA. Warburg Pincus has expressed interest

Beckett Collectibles — HPS and Freedom 3 backed the company back in 2022 as it underwent a digitization of its services, but is now looking to refi the existing $250m debt package

8th Avenue Food & Provisions — private credit firms are in talks to refinance the company’s existing BSL facilities

Higginbotham — the insurance agency returned to the market not long after securing an add-on to this time shave 100bps of its existing term loan

Quantum Design — PE firm Carson Private Capital is in talks with private lenders to fund its LBO of the lab equipment maker, which generated $20m in LTM EBITDA