Private lenders are cranking out loans fast to accommodate companies that want to finish deals before tax rules possibly change under a new U.S. president, increasing the risk of rising credit losses if the firms aren’t vetting companies well enough.
The private equity shops that often borrow from direct lenders are eager to get financing before year end, said Bill Sacher, head of private credit at Adams Street Partners, which has $41 billion in overall assets under management.
“It’s conspiring to create a real avalanche of new deal activity,” Sacher said in an interview. “The challenge for PE firms and private credit firms is that it’s causing a lot of the deals to be very rapid fire, almost drive-by transactions. Doing these deals rapidly has its hazards.” The timeline for closing a private credit deal has shortened to as little as about a week, from several weeks or more than a month previously, he said.
That’s particularly concerning as most lenders in the $850 billion private debt market tend to hold on to their loans long-term, with limited opportunities for offloading them if things sour. Inexperienced firms with less robust due diligence processes, or those with a higher risk tolerance may find themselves in a bad position in the future, even if defaults have eased now.
“The hazards are really on the diligence side and doing the underwriting -– not all lenders will be able to dot every ‘i’ and cross every ‘t’,” Sacher said.
Meanwhile, the growth of the asset class — which could swell to $1.5 trillion by 2025, according to some estimates — will be fueled by yield-hungry investors and portfolios that have held up reasonably well amid the Covid-19 crisis, according to Sacher.
“I do think that private credit remains in its ascendancy, and if anything, given where interest rates are likely to remain and how well portfolios held up, if you liked private credit before March you have to like it even more now,” he said.