10 March 2023
The global financial crisis of 2007 spawned the rapid evolution of the private credit industry. More than a decade and a half later, we believe that the current global macroeconomic environment will further cement its status as a growing market.
Despite a slowdown in M&A financings, following a peak of activity in 2021 and the first half of 2022, demand for private credit is continuing to increase as a more popular source of funding.
While its spread has borne familiarity and comfort among borrowers, private credit is also benefitting from difficulties in other parts of the funding market. With inflationary pressures and rising interest rates, activity in syndicated offerings has declined.
Although the private credit industry has grown quickest in North America, it is now developing at speed in other parts of the world as well. Since 2012, the private credit asset class in Europe has grown from $US36.2 billion of AUM to $US187 billion in 2022, according to the Deloitte Private Debt Deal Tracker Autumn 2022.
Like many sectors, private credit is not immune to current economic and fiscal challenges, yet the mood within the industry is positive. “We’re continuing to see an increase in these types of financing requests that had traditionally been funded elsewhere,” comments Patrick Ottersbach, Head of Macquarie Capital Private Credit, Europe.
Even in volatile markets, private credit continues to thrive and increases market share. Macquarie Capital sees two trends that are significantly contributing to the sector’s continued growth. First, the post-pandemic world has proven to be fertile ground for the private credit community, particularly as private equity sponsors have been sitting on plenty of dry powder and looking for debt to fund acquisitions. Two sectors largely unscathed by the COVID-19 pandemic are software and technology, which have driven especially high levels of deal activity. Examples include Macquarie Capital’s participation in a term loan and acquisition capex facility to support Partners Group's acquisition of Forterro, a pan-European provider of enterprise resource planning (ERP) software products and IT solutions services, in April 2022. The deal valued Forterro at €1 billion. Macquarie Capital also led and arranged the financing for Declaration Partners, Capitol Meridian Partners, and 22C Capital’s acquisition of LMI, a provider of technology-enabled management consulting, logistics, and digital and analytics solutions for the US. government.
Second, sponsors and borrowers are increasingly looking for longer-term partnerships, with private credit solutions offering additional flexibility, reliability and speed of execution. A unitranche facility further streamlines loan administration from the borrower’s perspective. This has been especially appealing in private equity-led M&A, including leveraged buyouts and bolt-on M&A transactions, which account for most direct lending deals, according to Deloitte’s Private Debt Deal Tracker Autumn 2022.
On top of steady capital growth, the private credit community has experienced a dramatic increase in demand for unitranche facilities over the last five years. Once the preserve of mid-market financing, these arrangements are now providing higher leverage solutions and moving into ever-larger deal sizes.
Jumbo unitranche deals have been and will continue to be more prevalent. There is a secular shift to these deals and that shift has only accelerated during recent times of market dislocation.”
Head of Principal Finance and Private Credit, Americas
Eckmann says that Macquarie Capital’s private credit book has more than tripled in the last three years.
Unitranche transactions use a hybrid structure that blends senior debt and subordinated debt into one loan instrument. In North America, these deals have regularly crept above the $US3 billion benchmark, including a $US4.5 billion loan supporting Hellman & Friedman’s acquisition of a majority stake in Information Resources in May 2022. Although these transaction sizes are typically not as large in Europe, the continent is very much following North America’s lead.
Due to building economic headwinds and general uncertainty in the markets, some private credit funds have reduced their position size in debt facilities to account for the riskier climate, but the sector has shown adaptability in assembling larger direct lender groups to sustain heftier unitranche financing. This is likely to continue in 2023, although deal values may be slightly lower than the highs of 2021 and 2022.
Confidence for 2023 may also lie in the growing appeal of private credit outside of the private equity segment. Eckmann says there is mounting interest from corporates and management teams: “Though private equity-backed companies are where we are seeing the vast majority of our deal flow, these other channels are driving an increasing percentage of our pipeline right now.”
The macroeconomic environment heading into 2023 may also create some challenges for the private credit sector: The recent increases in interest rates naturally dampens the desire for higher-leverage deals as borrowers face a less benign environment for servicing their interest, in particular, private debt typically uses floating interest rate structures. “Capital structures are becoming less aggressive as lenders and borrowers focus on interest coverage,” says Ottersbach. “Our approach, based on fundamental analysis and intention to hold on our balance sheet, positions us well to assess the risk and provide certainty to borrowers.”
Looking ahead, there are emerging signs of a recovery in syndicated markets. Institutional leveraged loan supply is expected to be $US250 - $US300 billion and high-yield supply is expected to be $US180 - $US200 billion.
Eckmann says that rebounding markets will likely continue to see a recovery in syndicated lending, but alongside continued growth in private credit. “As the market finds new ways to address geopolitical and economic issues throughout the remainder of 2023, there will be an uptick in opportunities for syndicated debt and private credit to thrive,” says Eckmann. “The market will recover, and when it does, Macquarie Capital remains uniquely positioned to deliver on our clients’ debt needs, through both our robustly growing private credit platform and our established syndicated leveraged finance offering.”
Head of Principal Finance, Americas
Head of Private Credit, EMEA