As M&A deal flow grows, another lens on how much risk investors are willing to take is visible in deal financing. Private equity’s increasing willingness to offer direct loans and hold them on their books is a focal point for higher levels of liquidity driving merger mania.
Direct lending has become more attractive to sponsors as they seek to close deals quickly and on certain terms. Rather than walk into a deal unsure about the ultimate pricing in syndication, PE firms are opting to secure debt on known terms. The resulting financing deals are more expensive, but high prevailing deal multiples make the difference between Libor plus or minus 100 basis points a rounding error.
Private loans well in excess of $500 million are becoming more common, Bloomberg notes, including a $2.6 billion loan to finance Thoma Bravo’s $6.6 billion take private of Stamps.com, announced last month.
The trend is strong enough that Churchill Asset Management co-head of senior lending Randy Schwimmer sees private credit taking “significant” market share from banks. Record industry fundraisings are giving sponsors the capacity to deploy larger loans. And in the middle market, a rush of deals can limit bankers’ bandwidth for originating smaller loans. Banks awash in deals prefer larger transactions, leaving middle market PE firms to go to other credit funds to finance their deals, Schwimmer says.
Some PE firms are even syndicating the loans they originate in a further challenge to banks. PE credit funds are likelier to hold on to the debt the provide, Schwimmer says, a distinction based in a firm’s confidence about the loan. But they can also reach out to friends and family to allocate slices of the debt in a trend Schwimmer says could grow as well—he wouldn’t be “surprised” to see credit funds open their own syndication desks.
The result could be even more liquidity for dealmakers to deploy.