PE / Private Credit Taking the Year Off?
Not sure what you guys are seeing, but deal flow seems to have completely dried up - was hanging on in March/April after a very slow January, but it seems like that has already fizzled out.
PE firms aren't coming to market right now unless they have to due to depressed multiples as the bid-ask widens -- this obviously significantly lowers PC deal flow as a result.
KKR essentially confirmed this on their earnings call stating that they are "not forced sellers" in that capital is locked up for many years.
As a side note, very interested to see how PC holds up, particularly in the LMM/MM space (< $50 EBITDA and in many cases, < $25MM EBITDA) - anything that got 5.5x+ leverage is going to struggle heavily with SOFR being at 5% (assuming no rate caps).
Also of note, the "Return of deal flow" keeps getting pushed out i.e., people said 1H'23 would be better back in 2H'22... and then it was 2H'23... now people seem to be coming to the realization that we'll be lucky to experience a return of deal flow by 1H'24...
Curious on others' opinions - bump
We do deals in both the MM and LMM. LMM is definitely holding up better than MM.
LMM valuations and leverage multiples do not fluctuate near as much. Combine this with the fact that many LMM companies are founder owned (and often wanting to sell the business as they approach retirement age), and it makes the current environment less of a challenge than for traditional sponsor backed MM deals. There is also less leverage put on these companies, so it will typically take more than just rates going up to trip a FCCR.
what size companies (EBITDA wise) are you defining as LMM? < $15MM EBITDA?
I'd say the LMM dynamic that I was talking about is more prevalent in < $10mm EBITDA companies.
Working in LMM PE, I can attest to companies with < $10MM EBITDA. To be honest, it has been quite busy in terms of deal flow.
European PC analyst here - market was super slow Jan-Mar 23 but significantly picked up within the last month, currently working on two deals and a commitment upsize simultaneously. Leverage for good assets still 5.5-6x and plenty of interest from PC funds. Portfolio is holding up pretty well as our IC is rather on the conservative end in their assessment, but some funds which were very aggressive in their deployment are definitely struggling rn with poor portCo performance.
Investment size usually 10-40m EBITDA
Work in PC MM and UMM and it has been busy for us the last few weeks.
In DCM role at a bank that does the pitching / structuring / execution for leveraged loans (both BSL and pro rata). We were finding momentum building in jan/Feb but the SVB crisis took the wind out of sails for about a month. High Yield market led us out of the mess and it feels like we’ve “reset” back to Jan / Feb with momentum building again.
My understanding is there are a decent amount of processes building out there that may look for financing in back half of 2023 - however I agree with your view that the return of deal flow keeps getting pushed out. Obviously fee income for the year is looking dicey but will hopefully be made up by other teams like rates / s&t etc.
Candidly I feel like private credit is in a better spot than BSL/banks as it remains a growing asset class with greater flexibility. The anecdotal feedback I’ve heard from PE is that sponsors are pissed direct lenders held firm on their pricing / increased pricing as leverage multiples have compressed - not sure how true that is. We see the Emerson (Copeland) deal coming back to the syndicated market for the interest savings relative to PC, but in general for more middle market borrowers I think private credit will win out and as such deal flow in the asset class should be fine.
We do see a bifurcation of private credit between industry, sponsor or non-sponsor, reason for capital necessity and rev/EV. Each is gonna originate at their own pace, so a blanket statement on all PC is tough.
I think an issue which has not surfaced is the life of funds and necessity to return capital and have another fund to roll the company. A secondary market for trading these illiquid loans will be needed, but the amount of questions I have raising this is too much to write lol
I am in LMM PC ($3-25mm EBITDA) and deal flow has hung on pretty well. Even in a healthier environment you aren't seeing many deals at this size get 5.5x leverage unless LTV is pretty low. Certainly down from Q4'22 but we have still seen a decent amount of deals. Now that banks have tightened up a lot more deals that would have gone through a bank are now coming to PC groups
Deal flow is totally fucked for this year imo. Everything that has come in has been dogshit - only quality deals coming to market are refis of existing deals with maturity walls. The Private Equity model simply cannot work at these rates, PC on the other hand is going to have incredible vintages during this cycle with where rates are
depends on how many PortCo's have to file BK / get RX'd - assuming this doesn't get out of hand, agreed.
I know this is a very small sample size but I am aware of 5 infra funds that are each involved with 4 different $1b-plus deals and are competitive. That’s not horribly impressive but that isn’t nothing either.
Infra they aren’t actually creating returns so they don’t care if their returns are trash because of rates. Much longer time horizon / don’t think is comparable
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