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Middle market health

When you don rose-tinted glasses, all the red flags suddenly disappear. Yet when the data reveals the optimism for a boost in M&A is unfounded, then its time the glasses come off and to confront the red flags suddenly appearing in sight.

So far this year the LBO market is not looking in good health and it’s unclear when the antidote is arriving. New data from Lincoln International has indicated that a lower flow of M&A deals is a worrying sign for a market that has been less action packed then normal. This is despite numerous investment bankers in recent months offering assurances that the next wave of deal flow is right around the corner.

Lincoln’s data shows that EBITDA growth slowed last year, falling a full percentage point lower than it was in 2023, while revenue growth fell to 6% from 8%, the lowest figure since 2020. And, just two-thirds of companies tracked by Lincoln in Q4 demonstrated EBITDA growth — the lowest percentage since Q3 2022.

A drop in performance by a portfolio company means sponsors are going to find it difficult to sell such assets. Indeed, that has translated into purchase price multiples dropping on average from 12.7x to 11.4x, Lincoln reports. This can only mean a further stymieing in M&A.

And it’s not just Lincoln noting the slowdown, Golub’s quarterly middle market report, the Golub Capital Altman Index, showed revenue growing nearly 6% in Q4 2024, while earnings jumped 9%. Impressive in a vacuum, until you realize that those numbers were 7% and 16%, respectively, at the end of 2023.

That’s not to say there aren’t plenty of opportunities and pockets of strength. Deals are still getting done and we could still be looking at a stronger year for opportunities this year compared with the previous two.

Just this week, 9fin reported on the nearly completed sale process of Solmetex, a water management services provider for the dental industry, as just one example. And if direct lenders have to head out as far as Istanbul to complete transactions, then they are certainly not afraid to do so.

Will tariffs take their toll?

New policies are coming in droves from this White House and it’s hard to keep up. And among the myriad of executive orders that are slowly going into effect are the anticipated tariffs promised by President Trump during his campaign.

This week, the first of those promises came to fruition, as the president imposed a 25% tariff on all steel and aluminum imports into the US — no exceptions or exemptions. Next to come are the president’s proposed tariffs on Mexico and Canada, though the jury’s out on whether or not those will eventually hit, and how. This may have a pretty significant impacts on American consumers and on different industries, especially if you’re involved in auto production.

The tariffs’ effect on private credit? Per David Golub, no one can be certain quite yet, though he noted it may be time to be cautious given the cascading effects of things like international disputes on domestic companies.

“I don't think anyone knows what the second, third, fourth order impacts could be, and a trade war probably isn't going to go well for anybody,” he said during the firm’s BDC earnings call last week.

Still, it seems likely that whatever policies go into effect, private credit lenders may get caught in the crosshairs.

On the chain

Over the last couple of years, private credit has sought to bring more and more retail investors into the fold. One way they’ve been doing is that by deepening its relationship with digital currencies.

The latest initiative is led by Goldfinch, a decentralized finance platform, which is aiming to provide retail investors exposure to established private credit names such as Apollo, Ares, Golub, and Stellus via its Goldfinch Prime fund, which is targeting returns between 9%-12%.

Blake West, co-founder and CTO at Warbler Labs, Goldfinch’s parent company, told 9fin said that platform chose non-listed BDCs because they have higher yielding investments than their listed BDC counterparts.

“The volatility is way lower,” West said in an interview with 9fin. “It’s a better play.”

This is a different approach to the one Securitize had at the end of last month, when it partnered with Apollo to offer blockchain access to a feeder fund that funneled directly into an Apollo fund.

Nevertheless, private credit is going digital — and now with an administration that is very supportive of growing the cryptocurrency market the timing perhaps couldn’t be better.

This week on the 9fin platform

Antares launches BDC with $1.4bn to invest in middle market companies

Middle market corporate growth slows and competition shows — Lincoln report

From GDP to M&A, tariffs raise questions for private credit 

Cotiviti moves quickly to raise Edifecs financing

Solmetex closes in on sale backed by direct lenders 

Oaktree raises $16bn for latest opportunistic credit fund

Private credit lenders provide $4bn to back Clario’s refinancing 

Louisiana pension fund commits $100m to Crescent private credit fund

StepStone buys Cresset’s private credit platform

What’s in market

Dream Games — The Turkey-headquartered mobile game maker behind popular names such as A Royal Flush is working with Goldman Sachs to raise up to $2.5bn in debt and equity

Finastra — The fintech company is exploring either refinancing or repricing its $5bn-plus debt load. The company went the private credit route to tackle looming maturities

One Call — Private credit firms are being called up to refinance the healthcare coordinator’s $1.3bn public debt. The company currently has backed from KKR and Blackstone

Neptune Retail Solutions — After first sounding out the BSL market, the retail advertisement company is turning to private credit for a $675m debt package

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

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

Solmetex — The water management services provider for the dental industry is working with investment bankers at Baird as it closes in on a sale to a private equity sponsor

From around the web

Bankrupt Car Wash Exposes Flaws in Private Credit Valuations (BBG)

Private credit market, high on M&A hopes, deregulation, recoils at tariffs (Pitchbook)

Private Credit Power Players Weigh In on the Next Big Risk (BBG)

Fitch flags ‘contagion growth’ threat as banks load up on private credit (MarketWatch)