The Unicrunch — Taxes, BDCs and refis

Shubham Saharan

12 July 2024•4 min read

The Unicrunch is our US private credit newsletter, in which we break down everything from unitranches to ABL lending. Find out more about 9fin for private credit, and sign up for the newsletter below.

Death, taxes, and other opportunities for private credit

Private credit seems to touch every corner of the finance world: from wonky asset-based transactions, life settlements, to now, taxes.

Or at least, tax receivable agreements (TRAs), which are giving credit investors yet another way to cash in on esoteric corners of the market.

Enter Andy Lee, the man behind Parallaxes Capital, who swoops in offering cash to holders of tax receivables tired of waiting for their payouts. Clients can get fast cash now, peace of mind later. Lee's firm dominates this quirky market, which went from $8 billion in 2017 to a whopping $30 billion this year.

But what exactly is a TRA? It’s a bond-like instrument, which usually comes about during an IPO or a merger and provides pre-IPO equity holders with payments derived from the company’s future tax benefits related to the depreciation and amortization of assets.

It’s a space that’s often yawned at by public investors and TRAs may sound obscure, but they grease the wheels of deals, speeding up negotiations and reducing headaches.

Lee’s mantra? It's not about good or bad investments, just the right price. So, if you're ready to trade tax certainty for cash today, he's your man.

Backing BDCs

Business development companies (BDCs) are among the bedrocks of the private credit ecosystem. Per the LSTA, BDCs account for approximately 40% of the private credit market, representing about $325bn of AUM as of the end of 2023.

As we’ve noted before, it’s a popular investment vehicle for asset managers to roll out when they’re trying more ways to tap institutional or retail capital. There’s a few that have launched in the last year, including Apollo’s Middle Market Apollo Institutional Private Lending, which is backed by Mubadala.

While not backed by a UAE-based investment manager, the latest firm to deploy that trend is Kennedy Lewis, which as we reported earlier this week, launched Kennedy Lewis' Capital Company (KLCC). The BDC is seeded by $200m provided by California State Teachers Retirement System.

As part of the newfound partnership, the pension fund will invest in the Kennedy Lewis special: secured lending via floating-rate loans to middle and upper-middle market non-sponsored deals. Hopefully they’ll be able to cash in on non-sponsored lending’s relatively loftier premiums, even as that market is facing its own issues with spread compression.

Refis are all the rage

When M&A is low and demand to deploy capital is high, there’s always one trusty way for lenders to get deals done: refis!

Whether in the public market or in private ones, sponsors and companies are eager to get the best bang for their buck when it comes to financing packages, and lenders are eager to please.

We’ve noted before how there’s fierce competition between banks and direct lenders to keep deals on their books and poach ones from their competitors.

While both sides have scored a fair few points on their opponent, it feels like private credit firms are moving to play offense from being defense for much of this year.

Case in point: in the last few weeks alone, 9fin has reported on numerous transactions moving from the syndicated market to the private ones, Inspira being just one recent example.

And private credit firms are poised to take another big win from banks’ books in the next few weeks as well. Pharmacy benefits optimizer RXBenefits is reportedly looking to the direct lending market to provide roughly $900m in debt financing to take out its syndicated debt. The new financing would also potentially be used to issue a dividend to shareholders.

At the same time, Madison Dearborn and Blackstone-backed HVAC (a sector loved by direct lenders) company Air Control Concepts switched from private credit to the syndicated market for its refi this week.

This week in 9fin

Quick Quack finalizes $1.2bn recap with private credit backing

The debt investors coming for your tax receivables

LA-based pension plan to double its private credit allocation

CalSTRS commits $200m to Kennedy Lewis BDC

RXBenefits looks to tap private credit market for refi

What’s in market

RXBenefits — the company is looking to refinance its existing debt with a roughly $900m private credit loan and possibly issue a dividend to shareholders

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

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