Private Credit and Its Investors Fret the Golden Age Has Gone

(Bloomberg) -- In hallways and wooden huts dotted around the SuperReturn International conference in Berlin, dealmakers are meeting to drum up new business. They’re also rehearsing answers to a question they’re hearing a lot these days: are the boom times for the $1.7 trillion private credit market over?

A year since Blackstone Inc. President Jon Gray hailed a “golden moment” for private credit, the shine is coming off Wall Street’s new money spinner. The pace of buyouts is slowing and some private credit funds are struggling to return cash to their investors. Banks are back, contesting deals and undercutting direct lenders on margins.  

“There has been an erosion of the private credit illiquidity premium,” said Matthew Bonanno, managing director at General Atlantic’s credit unit. “I think there is some frustration from LPs on this,” he said, referring to the limited partners such as pension plans and insurance companies that allocate capital to private credit funds.

Some funds simply can’t return enough capital to their LPs. Canadian investment manager Ninepoint Partners LP temporarily suspended cash distributions in three of its private credit funds last month to cope with a liquidity crunch. 

Others have exited entirely. Last month Fidelity International halted its European direct lending activities, less than a year since it held a first close on an inaugural fund.

Managers themselves acknowledge it will be hard to match 2023’s 12% return. 

Investors have also started worrying about the actions of borrowers in direct lending funds. In a move reminiscent of collateral stripping more common in leveraged finance, a Vista Equity Partners-backed tech learning platform Pluralsight Inc. shifted assets away from its direct lenders. 

That exposed weaknesses in direct lending documents thought to be immune from such controversial maneuvers, spurring worry the incident wasn’t just a one-off as covenants get looser.

“We think it’s become crowded given muted deal flow, and we see leverage increasing and spreads tightening,” said Emma Bewley, partner and head of credit at Partners Capital, an investor in private credit funds. “The opportunity is no longer as attractive in upper middle market senior direct lending.” 

Most of the concerns are focused on direct lending, the portion of the private credit market where funds make loans directly to companies to back acquisitions or leveraged buyouts.

To be sure, the current thinning in spreads does not present an existential threat to private credit. Returns have been strong in the last two years, beating private equity in some quarters, a trend that could be set to continue. At the same conference in Berlin, Apollo Global Management Inc.’s Co-President Scott Kleinman warned “fewer realizations and lower returns” are on the horizon for much of the private equity industry.

“These supply and demand dynamics ebb and flow,” said Vivek Mathew, head of asset management at Antares Capital. “I think the wider expectation is that the market is going to keep growing.”

Deals are back in contention from banks, but not all of them. Direct lenders remain the go-to financiers for small and midsized companies.

Partners Capital is looking more closely at areas like credit opportunities and specialist lending. General Atlantic is targeting private financing to family-owned business and smaller entrepreneurs for growth and acquisitions.

“Given the intense competition for the limited number of new sponsor-led deals the asset class has to open its investment aperture,” Bonanno said.  

Deals

• Encyclopaedia Britannica Inc., the publisher of the namesake encyclopedia and the Merriam-Webster dictionary, is looking to raise $450 million of fresh capital to repay debts of its Swiss owner Jacob E. Safra
• Rayonier Advanced Materials Inc., the cellulose chemical provider spun off from Rayonier Inc. a decade ago, is in talks with lenders, including private credit firms, to refinance some of its debt
• Rubio’s Coastal Grill, a fast-casual chain known for its fish tacos, filed for its second bankruptcy after high labor costs weighed on earnings
• Private debt fund manager Golub Capital will become the largest minority equity holder in insurance specialist Nassau Financial Group after providing $200 million to the firm as part of a minority non-voting common equity investment
• Vista Equity Partners-backed Pluralsight Inc. is getting advice from law firm Kirkland & Ellis and Ducera Partners in connection with its recent dropdown transaction. A group of lenders have engaged Centerview Partners and Davis Polk & Wardwell
• MetLife Inc. is pursuing an acquisition of Hayfin Capital Management, the private credit specialist that began exploring a sale last year. Todd Boehly’s Eldridge Industries also held talks to acquire Hayfin
• Price talk for private lender financing of PowerSchool’s potential buyout is around 4.75 percentage points over the US benchmark
• A group of private credit firms are not yet on the list of creditors eligible to take part in the debt restructuring plan of media company PT Visi Media Asia, part of Indonesia’s conglomerate Bakrie
• Thai energy producer B.Grimm Power PCL is seeking as much as $600 million in private debt to build an offshore wind farm in South Korea
• Private credit lenders are in talks to provide a roughly $950 million debt facility to support the planned buyout of a Synopsys Inc. unit by Francisco Partners Management and Clearlake Capital

Fundraising

• Eighty percent of insurance companies surveyed by Moody’s Ratings said they plan to increase their holdings of at least one class of private credit over the long term
• A new Lombard Odier fund is offering investors including wealthy individuals a means of investing in a hot private credit niche
• A British artificial intelligence startup plans to launch a private credit fund to buy servers outfitted with high-powered Nvidia Corp. chips to be used by companies in Asia
• Pemberton Asset Management is raising at least $1 billion along with Abu Dhabi Investment Authority to back private equity firms with a niche form of lending
• Goldman Sachs sold a slug of middle-market loans held on its balance sheet to seed a new European private credit fund with credit secondaries investor Pantheon and Singaporean sovereign wealth fund Temasek Holdings

Job Moves

• Arini, an alternative-asset manager, hired former Goldman Sachs Group Inc. executive Nabil Aquedim as head of real estate and asset-backed strategies
• US-based asset manager Franklin Templeton created a new team, the alternatives EMEA wealth management division, which will be lead by London-based George Szemere
• BlackRock Inc. has named Yik Ley Chan to lead the firm’s private credit efforts in Southeast Asia
• Paul Hastings is hiring an 11-partner restructuring and finance team headlined by the former leader of King & Spalding’s private credit and special situations group, Jennifer Daly
• Crescent Capital Partners Management Pty., an Australian private equity firm, is expanding into private credit and has hired Russell Sinclair from PricewaterhouseCoopers LLP to run the new business

Did You Miss?

• Morgan Stanley’s Miller Says Bank Rules Boost Private Credit
• Private Credit, Wall Street’s Hottest Trade, Has an Ugly Moment
• Adviser to $60 Billion of Retail Cash Bets on Private Markets
• KKR Mulls Entering Private Credit Industry in Japan
• Private Markets’ Growth Faces Scrutiny From Australian Regulator
• Canada’s Ninepoint Halts Cash Payouts on Three Credit Funds
• Banks Pump Billions More Into Private Credit as Frenzy Grows
• Private Credit’s New Way to Keep Payment-in-Kind Under the Radar

©2024 Bloomberg L.P.