Private Debt News Issue #12: Litigation, Strategic Investments, and Mega-Deals (5.18.24)

From High-Profile Lawsuits to Sovereign Wealth Funds' AI Push – The Dynamic Landscape of Private Credit

The private credit market continues to be shaped by a complex interplay of legal battles, strategic investments, and record-breaking deals, as participants navigate an increasingly competitive and rapidly-evolving landscape. This week's Private Debt News delves into the latest developments shaping the industry, from Corinthia's motion to dismiss Barings' team lift lawsuit to Abu Dhabi's deepening focus on AI and private credit investments.

1. Corinthia Files Motion to Dismiss Barings' Team Lift Lawsuit

In a significant development in the high-profile legal battle between Corinthia Global Management and Barings, the upstart private credit manager has asked a judge to dismiss the asset manager's lawsuit over the poaching of more than 20 employees in March. Corinthia argues that Barings has not provided any evidence to support its claims of harm resulting from the team lift, which sent shockwaves across the private credit market.

The legal dispute underscores the fierce competition for talent in the rapidly-growing private credit industry, as firms seek to build out their capabilities and capture a larger share of the $1.7 trillion market. The outcome of the case will be closely watched by market participants, as it may set important precedents for the enforceability of non-solicitation agreements and the boundaries of acceptable practices in team recruitment.

As the private credit landscape becomes increasingly crowded and the war for talent intensifies, firms will need to strike a delicate balance between aggressive growth strategies and the need to maintain strong relationships with clients and employees. Those that can navigate these challenges while upholding the highest standards of integrity and professionalism will be best positioned to thrive in the long run.

2. Abu Dhabi's $302 Billion Fund Deepens AI and Private Credit Push

Mubadala Investment Co., Abu Dhabi's second-largest sovereign investor with $302 billion in assets under management, has significantly expanded its investments in artificial intelligence and private credit as part of its broader strategy to capitalize on the growth potential of these sectors. The wealth fund deployed $24.2 billion last year across a range of industries, with a particular focus on AI, technology, digital infrastructure, life sciences, and clean energy.

The move by Mubadala reflects the growing interest among sovereign wealth funds and other institutional investors in the transformative potential of AI and the attractive risk-adjusted returns offered by private credit. By partnering with leading technology firms and asset managers, such as G42 and Apollo Global Management, Mubadala aims to position itself at the forefront of these rapidly-evolving industries and capture the value creation opportunities they present.

As more sovereign wealth funds and other large-scale investors allocate capital to AI and private credit, the competitive dynamics of these markets are likely to shift, with implications for pricing, deal flow, and the overall investment landscape. Managers that can differentiate themselves through specialized expertise, strong origination capabilities, and value-added partnerships will be well-positioned to capitalize on this growing demand and deliver compelling returns to their investors.

3. Aflac to Take a 40% Stake in Tree Line Capital Partners

Insurance giant Aflac has agreed to acquire a 40% stake in Tree Line Capital Partners, a San Francisco-based lower middle-market direct lender with $2.7 billion in assets under management. The deal, which aligns with Aflac's core investment principles and disciplined approach to credit underwriting, represents a significant vote of confidence in Tree Line's business model and growth potential.

The partnership between Aflac and Tree Line highlights the increasing convergence between the insurance industry and private credit asset managers, as insurers seek to diversify their investment portfolios and capture the attractive yields and downside protection offered by direct lending strategies. By providing Tree Line with a stable source of long-term capital and a strong institutional partner, the deal is expected to accelerate the firm's growth and enhance its ability to serve the financing needs of lower middle-market businesses.

As more insurance companies and other institutional investors allocate capital to private credit, the market is likely to see a proliferation of strategic partnerships and minority stake acquisitions, as asset managers seek to secure the resources and relationships necessary to scale their platforms and compete effectively in an increasingly crowded landscape.

4. Private Credit Firms Lend $650 Million to In-Home Care Provider

A consortium of direct lenders, led by Brightwood Capital Advisors, Stone Point Credit, and Texas Capital Securities, has provided a $650 million private credit package to Giving Home Health Care (GHHC) to refinance the company's existing debt and pay a dividend to its owners. The transaction, which includes a $600 million first-lien senior secured term loan and a $50 million revolving credit facility, underscores the continued appetite of private credit firms for stable, cash flow-generating businesses in defensive sectors such as healthcare.

The GHHC financing also highlights the growing trend of private credit firms collaborating on larger, more complex transactions, as they seek to deploy capital efficiently and diversify their risk exposure. By pooling their resources and expertise, these lenders can provide borrowers with the scale and flexibility they need to optimize their capital structures and pursue their growth objectives.

As the private credit market continues to mature and evolve, we can expect to see more of these multi-lender, multi-tranche financing solutions, particularly for companies operating in niche or specialized industries. Managers that can demonstrate a strong track record of origination, underwriting, and portfolio management in these sectors will be well-positioned to capitalize on these opportunities and deliver attractive risk-adjusted returns to their investors.

5. Blackstone, Goldman Undercut Rivals in $900 Million Private Loan

In a testament to the intensifying competition among private credit providers, Blackstone Inc. and Goldman Sachs Asset Management have joined forces to provide the largest portions of a $900 million direct loan to Depot Connect International (DCI), a KKR & Co. portfolio company. The financing, which also includes participation from Apollo Global Management Inc., will enable DCI to refinance its existing, more expensive private debt at a rate of just 4.75 percentage points over the Secured Overnight Financing Rate (SOFR).

The aggressive pricing and terms of the DCI loan reflect the growing pressure on private credit firms to deploy capital in an environment characterized by a flood of dry powder and limited deal flow. As lenders compete fiercely to win high-quality transactions, they are increasingly willing to offer more borrower-friendly terms, such as tighter spreads and lower original issue discounts.

While the DCI financing represents a win for the borrower and a testament to the strength of the private credit market, it also raises questions about the sustainability of such pricing levels and the potential impact on lender returns in the long run. As the market becomes increasingly competitive and the hunt for yield intensifies, managers will need to maintain a disciplined approach to underwriting and risk management to ensure the long-term viability of their portfolios.

6. Permira Taps Private Credit Market for $6.9 Billion Squarespace Take-Private

Private equity firm Permira has turned to the private credit market to help finance its $6.9 billion acquisition of website-building platform Squarespace, with Ares Capital, Blackstone, and Blue Owl providing a $2.65 billion financing package. The transaction, which will see Permira purchase Squarespace shares at a 30% premium to the company's unaffected share price, underscores the growing role of private credit in enabling large-scale, complex buyouts.

The Squarespace deal also highlights the increasing collaboration between private equity sponsors and direct lenders, as they seek to leverage each other's expertise and resources to execute on ambitious investment strategies. By tapping into the deep pools of capital and sector knowledge offered by private credit firms, sponsors can enhance their ability to identify and capture value creation opportunities in a rapidly-evolving market landscape.

As the lines between private equity and private credit continue to blur, we can expect to see more of these mega-deals and strategic partnerships, as market participants adapt to the changing competitive dynamics and seek to differentiate themselves through scale, specialization, and value-added services.

7. Raymond James Establishes New Private Credit Business

Investment bank Raymond James has announced the launch of a new private credit initiative, partnering with Eldridge Industries and Raymond James Bank to provide financing solutions to sponsor-backed portfolio companies across four key sectors: Consumer, Diversified Industrials, Healthcare, and Technology & Services. The move reflects the growing convergence between traditional investment banking and private credit, as firms seek to offer a full suite of capital markets and advisory services to their clients.

The Raymond James Private Credit joint venture brings together the firm's extensive relationships with middle-market private equity firms, the lending expertise of Raymond James Bank, and the asset management and capital markets capabilities of Eldridge Industries. By leveraging these complementary strengths, the initiative aims to provide differentiated, tailored financing solutions to borrowers while generating attractive risk-adjusted returns for investors.

As more investment banks and other traditional financial institutions enter the private credit arena, the competitive landscape is likely to become increasingly complex and dynamic. Managers that can effectively navigate this new environment by building strong origination networks, maintaining rigorous underwriting standards, and delivering value-added services to their clients will be well-positioned to succeed in the long run.

Conclusion

This week's Private Debt News highlights the multifaceted and ever-evolving nature of the private credit market, as participants grapple with legal challenges, strategic investments, and record-breaking deals. From the high-stakes litigation between Corinthia and Barings to the growing interest of sovereign wealth funds in AI and private credit, the developments covered in this issue underscore the dynamism and resilience of the asset class in the face of complex market forces.

As the private credit industry continues to mature and expand, managers will need to remain agile, innovative, and focused on delivering differentiated value to their investors and borrowers. By cultivating strong partnerships, maintaining disciplined investment processes, and adapting to the changing competitive landscape, the most successful firms will be well-positioned to navigate the challenges and seize the opportunities that lie ahead.