The Unicrunch — Stocking up on private credit

David Brooke

6 December 2024•5 min read

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Gifting middle market to the masses

There are certain holiday classics that could not be made today. For every Arnold Schwarzenegger trying to buy a Turbo Man, there is Amazon. For every jittery bank customer, there is online banking — and for every child left behind at home or an airport there are smartphones to keep parents connected.

But there is a pull that such classics have that make us want to revisit these gone, but simpler times every year. And as each month goes by, and private credit matures more and more as an asset class, nostalgia may be the feeling we wake up to when everyone clocks off for the year.

What we assumed was once an illiquid class is no longer. Exchange-traded funds (ETFs) for private credit loans are now live with BondBloxx and Virtus Investment Partners launching the first of such products this week. Both will invest in private credit CLOs and the BondBloxx product has so far invested in structures managed by Golub, Antares, Carlyle and Ares among others.

These products, of course, arrive just in time for Christmas — if you still don’t know what to get a loved one.

Prior to such moves, retail investors had only BDC ETFs to invest in, such as the ones managed by VanEck and Franklin Templeton. The latest products allow investors to go one step further and invest directly in the loans, as opposed to the managers of the loans.

Apollo is also in on the ETF game — the credit giant is building a business on blue-chip debt with the long-term plan to trade such assets via ETF vehicles. (9fin reported on Apollo’s interest in ETFs and partnership with State Street here.)

And it’s not just ETFs coming for the public — HPS Investment Partners launched a private BDC to attract investors to invest upper middle market loans, 9fin reported earlier this week.

When I was growing up, stocks were bought and sold at physical exchanges. By the time I started covering private credit, it was a market for institutional investors. But the push towards new capital sources is the name of the game. Scale is key in this market, and the available retail capital far outweighs institutional capital available.

There is no shortage of retail capital eager to participate. As markets become increasingly privatized, many investors don’t want to miss out on this structural shift. However, the private credit story was originally about shifting the risk of middle market lending away from retail investors and depositors, and towards sophisticated institutional investors — so to avoid a repeat of too big to fail, but still ensure smaller companies had access to capital.

This once-simple story is becoming more complex. As we’ve cautioned on these pages at 9fin, inviting retail money into private credit also invites regulators. The rise of private credit memes highlights that some observers are gearing up for this market to receive a reality check.

Granted, the ETF buying crowd is different to passive depositors. And none of the apocalyptic warnings about private credit have materialized. The ETF structure disperses risk across hundreds of individual loans. We’re not remotely close to the days of 2008’s global meltdown, even if an ECB official is already sounding the alarm on systemic issues.

Nevertheless, the evolving narrative suggests that by this time next year, there may be even more convenient ways for retail investors to gain exposure to middle market loans. But as holiday classics show us, people don’t want stories to change.

Sure, Kevin McCallister could contact his parents today on a smartphone — but he can also buy private credit exposure through a mobile app. While I can’t see this storyline making it to the silver screen anytime soon, Hollywood did manage to turn the GameStop frenzy into a movie.

Can’t buy private credit exposure through a landline phone (via DigitalSpy)

Putting a gloss on it

We’ve previously mentioned that private credit has a language problem. There is a lack of consistency across firms use of terms by firms, with nearly every term having a synonym in circulation. Additionally, the terms differ in the US and Europe — are Americans familiar with what a ‘mulligan’ is?

The inconsistency highlights the challenge of translating a complex market into an accessible language.

That’s why LSTA’s glossary of private credit terms is a welcome development. You can now check out what a ‘40 Act entails, or learn the difference between asset-based finance and an asset-based loan. There’s even a definition of ‘middle market’ — the great enigma of our time.

But while useful for us reporters and those market professionals with gaps in their knowledge, it still may not be helpful for friends and families who have no idea of what we do all day.

**This week on the 9fin platform**

Astro Pak taps banker for potential sale

Are juiced spreads in the lower middle market worth the squeeze? Cliffwater finds out

AmSpec seeks 125bps cut moving from private debt to BSL

HPS launches private BDC targeting upper middle market

Blackrock set to acquire HPS for $12bn

What’s in market

Frazier & Deeter — the accountancy firm is being marketed on a $20m LTM EBITDA and is proving to be a popular asset as sponsors are bidding up to 15x

Honeywell’s PPE unit — while banks are taking care of the debt financing, a separate $400m preferred equity tranche seems perfectly suited for a private credit firm

Triumvirate Environmental — the waste management services company is in talks with direct lenders to fund a potential sale, which is looking to close at a 13x multiple of its $100 EBITDA. Raymond James has been hired to run the process

Sizzling Platter — UBS is advising on the proposed sale of the CapitalSpring-owned restaurant franchisee. The company generates a $150m EBITDA

Encylcopedia Britannica — Bank of America has been brought on to advise on the sale of the $40m-plus EBITDA company.

Accupac — owner Palladium Equity Partners has tapped Piper Sandler to explore a $200m refinancing for the cosmetic contract development company

Midwest Transit Equipment — the BrightWater-backed distributor of new and used buses is exploring a sale with the help of investment bank Harris Williams

Lycra — The spandex maker is approaching opportunistic credit funds for a $350m debt deal, to partly refinance the company’s existing facilities

Amerit Fleet Solutions — the Brightstar-backed maintenance provider for delivery vehicles is exploring a potential sale with the help of advisors Moelis & Company