Private Credit Takes Center Stage in Acquisition Financing

November 06, 2023

Key Takeaways

78% already make use of private credit for acquisition financing at the portfolio level

The U.S. regional bank crisis in early 2023 rattled the markets and has exacerbated a trend towards private credit as a financing option across the globe. This has not gone unnoticed at the multi-strategy asset managers and of those who do not already have a private credit financing strategy, 73% are considering adding one.
In addition to utilizing private credit to fund acquisitions, private credit can also be used by GPs for fund-level financing as effective tools to improve capital efficiency and rapidly back new acquisitions.

The U.S. regional banking crisis in early 2023 that saw the collapse of Silicon Valley Bank and Silvergate Bank, and the Federal Deposit Insurance Corporation’s (FDIC) seizure of Signature Bank and First Republic Bank, rattled markets. Tellingly, 31% of North American respondents specifically say they will move to large financial institutions that are systemically important. This falls to 20% and 12% of APAC and EMEA respondents, respectively, who say the same.

This kind of market disruption is making alternative lenders look comparatively attractive to PE, fueling a trend that was already well under way. Over a third of respondents (35%) say they intend to move more towards private credit providers in light of recent banking stresses and the flexibility that alternative credit structures provide, a trend visible across all parts of the world.

“Sourcing loans from private debt funds is very relationship-driven and, particularly in the current environment, that gives you downside protection,” says partner Chris Field. “If a portfolio company gets into difficulties, the GP is only dealing with one lender or a limited number of direct lenders that often have financed multiple companies and have extended relationships across that PE manager’s portfolio. That makes it a very different discussion than dealing with disparate lenders that have no particular interest in your continued survival.”

Half of APAC respondents use private credit at the portfolio level not to back new deals but to fund leveraged recaps.

Exit volumes have typically been lower and taken longer to realize in Asia compared with more established markets such as the U.S. and Europe. Recaps in APAC are providing sponsors with a way to return cash to their LPs while their investments come to fruition.” Siew Kam Boon, Partner Dechert’s PE practice

In terms of the structures most widely used by sponsors when seeking private loans, most respondents overall use ABS/ structured products (61%), as well as structured preferred capital (55%) and recurring revenue loans (also 55%). All of these products are expected to be increasingly employed over the next 12 months.

The vast majority of respondents across all regions (85%) say their firm already has a private credit investment strategy in place. “Our credit fund took shape about four years ago and has been working well for us,” says the managing director of a PE firm in the U.S. “We’re lending into high-growth sectors that have proven to be resilient during this more challenging economic period and aim to raise further funds.” As yet further evidence of this strategy’s popularity, of the remaining 15% of respondents that are not currently active in private debt, 73% say they are considering expanding into this ascendant asset class.

Footnotes

The preceding article is an excerpt from the 2024 Global Private Equity Outlook report, an annual publication that uses qualitative and quantitative findings to look at current PE industry trends and views on where the market is heading in 2024.