Deal backlog

The ARIA Hotel was bustling. Around 2,000 professionals hiding from the desert sun in the air conditioned complex gathered to discuss the biggest issues in middle market M&A with one question on everyone’s lips: What do we do about the continued depressed LBO activity?

“One of the things that's really different about this time is that it's been a year and a half to two years since we felt that we were in a pretty robust M&A market,” Justin Abelow, a managing director in the financial sponsor groups at Houlihan Lokey said in a panel appearance on Tuesday.

The data shows that Abelow is right. Last year was a rough one for dealmakers as the total M&A market plummeted 15% to $3.5trn — the lowest level in a decade according to a report by Bain & Company.

And so far this year hasn’t been much better. Low deal flow seemed to be the tune that many of the conference attendees were singing as they flitted from meeting to meeting across the event’s three floors. Heads of private equity and private credit firms tell us that high debt costs and choppy markets are stymieing the flow.

Yet that isn’t for want of trying, attendees said. What is frustrating is that there is pent up energy (and capital) among sponsors and the deals should soon be there. The question is a matter of when, as the impatience grows.

As Abelow noted: “One of the things that's happened is that we've seen this enormous backlog kind of grow and sort of hanging out in the market like a sword of Damocles.”

M&A green shoots

So as we get further into 2024, many market participants are hopeful that energy is about to be released.

At least that was the optimism expressed among investment bankers, private equity heads, and lenders as they connected over networking luncheons, golf, and at times, roulette and blackjack tables.

Indeed, this week 9fin has reported that some deals are bubbling up.

For example, software company Avetta recently tapped a club of direct lenders including Blue Owl Capital, Ares Management, Golub Capital, and AllianceBernstein to fund a leveraged buyout by EQT, 9fin reported earlier this week. The club is reportedly putting together a roughly $1b loan, which is priced at SOFR+450bps, making it among one of the more tightly priced loans in the private credit market.

Another example: Wind Point Partners’ acquisition of architecture and engineering services firm MOREgroup was funded with between $200m-$250m of debt, 9fin reported. Private credit firm Monroe Capital was the joint lead arranger on the senior credit facility, which priced between SOFR+525bps-550bps, sources said.

And there is the carve-outs. Private credit firm Invesco has led the debt financing backing the leveraged buyout of Associated Spring, a manufacturer of springs and other engineering components, 9fin reported.

Gear and loaning

With transactions steadily increasing we might be entering a “new normal”, says Charlie Gifford, senior partner at New Heritage Capital said during a panel appearance on Tuesday, as sponsors begin to regain the upper hand on a number of economics and terms.

“Anytime you're a year or more into a new normal, eventually people will start adjusting to behavior,” he said. “I feel as though deal flow is picking up. The cost of capital is going down, leverage multiples are going up, public equity markets are continuing to be strong, so it does feel better.”

That new normal we’ve entered seemingly entails a lot of concessions by lenders. Numerous private credit professionals I met at the conference noted that winning deals these days often means slashing pricing, offering looser covenants, or coming up with more imaginative financing solutions that help companies reckon with their debt loads.

Still, it’s not all give on the lenders’ behalf, sources noted. Private credit firms are negotiating for portability clauses to keep assets in their books, and they’re using the leverage they have (pun intended) to push for more dealmaking down the line.

Nowadays, that may mean lenders push for shorter tenors on loans, says one managing director at a private credit firm attending the conference. The experience of depressed sale volumes and the continued holding onto assets has prompted a rethink on maturities — a shorter one brings the sponsor to the table earlier.

Loans that used to mature in five to seven years are now being offered with three or four year maturities, they added.

“We have to get the gears turning again,” said a managing director at a private credit firm attending the conference. “Lenders are nudging sponsors towards an exit too. We’re starting to see lenders decrease tenor on loans to push sponsors to sell sooner.”