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Private Credit 

Shubham Saharan

Peter Benson

Last year was not a good year for leveraged buyout activity. And this year may not be a lot better.

There remains optimism, however, among traditionally pessimistic credit folks, that M&A will pick up, according to conversations with our sources. Like the old adage whatever goes up must come down, some are hoping the reverse is going to happen.

So when a close to $5bn unitranche appears on the horizon, you can be forgiven for some excitement among those few living in hope. Direct lenders led by Ares and Blue Owl are reportedly preparing a $4.8bn debt financing package for the proposed buyout of pharmaceutical manufacturer Catalent by Novo Holdings.

Such a deal, if completed, would put it on par with the record-breaking private credit financing for Finastra funded last year.

No deal, however, is without obstacles. And usually the bigger the company, the bigger the obstacle. Earlier this week, Novo Holdings’ parent company, the Novo Nordisk Foundation, re-submitted a deal application with the Federal Trade Commission after “informal discussions with FTC staff”, per a filing from Catalent.

In so doing, Novo Nordisk has given “the FTC additional time to review the [t]ransactions," the filing states. That resubmission also triggers another 30-day waiting period during which the FTC will review the forms. The agency can also choose to extend that waiting period.

Perhaps we won’t see the deal emerge until 2025. As we saw with Finastra, these large deals can run on for months and months. And it can just feel acutely painful for those determined to deploy capital when it follows a year that the total M&A market plummeted 15% to $3.5trn, the lowest level in a decade according to a report by Bain & Company.

Still, headline grabbing unitranches don’t reflect the day-to-day business of private credit dealmaking. And while less glamorous, it is execution in the sub-$1bn financing packages that are put together on a regular basis.

A recent example includes Frazier Healthcare Partners’ buyout of payment solutions provider RevSpring. The company secured a roughly $650m private debt commitment to fund the acquisition, 9fin reported. HPS led the financing, which also included backing from Antares and Goldman Sachs’ private credit arm.

And, when private credit lenders aren’t busy funding LBOs, they have time to work on refinancings and add-onswhile defending their portfolios from encroachment by the increasingly active broadly syndicated market.

Recent refinancings completed in the private credit market include a $725m deal for onsite employee healthcare provider Premise Health and a $275m refinancing for healthcare services company Matrix Medical Network.

So the long back and forth between levfin markets by private lenders continues — just don’t measure progress on the multi-billion dollar unitranches alone.

We talk a lot about the middle market, but what actually is it? There have been many attempts to define it, but without a clear consensus in the market, the best we can work with is the expression that you know it when you see it.

And who better than Golub Capital who knows the middle market and sees it every day. For according to the latest Golub Capital Middle Market Report, earnings for middle market private companies in the Golub Capital Altman Index jumped 11% in the first quarter of 2024, while revenue grew 4.6% during the same period. The index measures the performance of between 110-150 companies in Golub’s portfolio.

“Growth in Q1 2024 was solid and consistent with our expectations,” Lawrence E. Golub, CEO of Golub Capital, said in the report. “Resilient private equity-backed companies are attractively positioned even if the pace and magnitude of rate cuts fall short of the prevailing consensus.”

Still, that growth in privately owned middle market companies’ revenue is lower than the index has reflected in previous quarters as interest rates have remained higher than in decades and profit margins have contracted.

In Q4 2023, revenue for private middle market companies grew 7.4% and earnings shot up 16.3%. In the Q1 of 2023, those numbers were 11.1% and 10.9%, respectively.

Private credit is inherently tough to benchmark, but Golub’s picture gives us a good estimation that lines up with the squeeze we at 9fin are hearing about for lenders and their portfolio companies. Whether such companies are as resilient as Golub suggests remains to be seen.

Over the last decade there have only been a few occasions when returns on private credit surpassed 10% — those were previously 2016 and 2021. Now you can add 2023.

A new report from Cliffwater shows that the asset class returned 12.13% last year — the second highest annual return the index has recorded in the past decade. The only year that beat it out was 2021.

Cliffwater’s Direct Lending Index is an asset-weighted index of almost 15,000 middle market loans financed by private credit firms totaling $315bn.

But higher returns does not mean the picture is not entirely glossy. Cliffwater says: “Higher yields have been associated with economic distress and high reference rates and lower yields associated with economic growth and low reference rates.”

But private credit, compared with other debt asset classes, looks in good shape.

Because often private credit loans tend to be refinanced within three years of issuance (despite what is often a seven-year maturity), Cliffwater calculates a “3yr takeout yield” and compares it with equivalent calculations in the BSL and HY indexes.

From September to December 2023, the 3-year takeout fell to 12.2%, beating out the Morningstar LSTA US Leveraged Loan 100 index, which over the same period fell to 9.47% from 9.63% and the Bloomberg High Yield Bond Index, which dropped to 7.59% from 8.88%.

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