Private Debt News Issue #7: Mega-Deals, Market Shifts, and Mixed Signals (4.7.24)
From Record-Breaking Financings to Fundraising Challenges – Private Credit’s Evolving Landscape
The private credit market continues to make headlines with a mix of record-breaking deals, shifting strategies, and signs of potential headwinds. This week’s Private Debt News examines the latest developments shaping the industry, from jumbo-sized financings to the challenges faced by mid-tier and less-established managers in the fundraising arena.
1. Ares and Blue Owl Lead $4.8 Billion Private Debt Financing for Catalent Deal
In a testament to the growing clout of private credit, Ares Management Corp. and Blue Owl Capital Inc. are spearheading a $4.8 billion debt financing package to support the acquisition of pharmaceuticals manufacturer Catalent Inc. by Novo Holdings. The deal, which comprises a $4.2 billion term loan and a $575 million revolving line, is among the largest private credit transactions on record and underscores the ability of direct lenders to provide sizeable and complex financing solutions.
The Catalent deal is a significant win for private credit managers, who have faced increased competition from banks in recent months for large acquisitions and buyouts. The financing also attracted participation from a wide range of prominent players, including Blackstone Inc., Apollo Global Management Inc., Oaktree Capital Management, HPS Investment Partners, Golub Capital, Antares, and Goldman Sachs Group Inc.
As private credit continues to gain market share in the leveraged finance space, deals like the Catalent financing demonstrate the asset class’s ability to compete with traditional banks and provide borrowers with the flexibility and certainty they seek in a dynamic market environment.
2. Thoma Bravo Seeks Price Cut on Coupa’s $2.6 Billion Private Debt
In a sign of the shifting power dynamics in the private credit market, Thoma Bravo is looking to take advantage of the recent rally in credit markets to slash the cost of a $2.6 billion private debt package that financed its buyout of Coupa Software Inc. The private equity firm has asked existing lenders to reduce the interest margin on the debt by 2 percentage points to 5.5 percentage points above the Secured Overnight Financing Rate.
The move reflects the intense competition between Wall Street banks and private credit firms to win deals, as the leveraged loan market has seen a surge in repricings this year. The trend has spilled over into the private credit space, with direct lenders offering similar deals to prevent losing business.
As borrowers increasingly seek to optimize their financing costs, private credit managers will need to remain nimble and responsive to market conditions to maintain their competitive edge and protect their market share.
3. Private Credit Funds Struggle to Raise Cash Amid Slowdown in Distributions
While private credit has been a darling of the alternative investment world in recent years, the asset class is showing signs of a potential cooldown as limited partners (LPs) become more cautious in their allocations. According to PitchBook data, private credit funds attracted the least amount of commitments since 2018, with the time required to close a new fund stretching to a record 20 months.
The slowdown in fundraising is largely attributed to a drought in new buyouts, which has slowed the return of cash to investors and reduced distributions of paid-in capital (DPI). As a result, LPs have less cash on hand to commit to new funds, putting some funds in limbo and threatening the survival of others.
Mid-tier and less-established managers have been hit the hardest by the fundraising challenges, as investors tend to gravitate towards larger, more established firms with longer track records and greater resources. As the private credit landscape becomes increasingly competitive, managers will need to differentiate themselves through specialized expertise, strong performance, and compelling value propositions to attract and retain investor capital.
4. Apollo in Talks to Finance Renewed Saks Offer for Neiman Marcus
In a potential blockbuster deal that could reshape the luxury retail landscape, Apollo Global Management Inc. is in discussions to provide debt financing to support Saks Fifth Avenue’s potential acquisition of rival Neiman Marcus. The alternative asset manager has discussed offering a loan of at least $1 billion to support the deal, with Saks’ flagship store at 611 Fifth Ave. in Manhattan, valued at $3.62 billion, potentially serving as collateral for the financing.
The deal would bring together two of America’s most iconic high-end retailers after years of on-and-off courtship and highlights the growing role of private credit in facilitating large-scale mergers and acquisitions. As the largest alternative credit manager, with about $480 billion in such assets, Apollo is well-positioned to provide the significant financing required for the potential transaction.
The Saks-Neiman Marcus deal also underscores the heightened demand for high-end real estate in prime locations, such as Manhattan, and the potential for such assets to serve as valuable collateral in private credit transactions.
5. Private Credit Barely Offers Extra Returns After Fees, Study Shows
Despite the rapid growth and increasing popularity of private credit, a recent academic study published by the National Bureau of Economic Research has called into question the asset class’s ability to generate meaningful excess returns for investors after accounting for fees and additional risks.
The paper, which examined private credit funds launched between 1992 and 2015, found that the risk-adjusted return on $1 of capital invested was indistinguishable from zero after considering the net-of-fee distributions and adjusting for both equity and debt-related risks. The researchers noted that while private credit funds are able to generate an additional 4% return before fees, this is approximately equal to the management fees and carried interest charged by the funds’ general partners.
The findings underscore the importance of carefully evaluating the fee structures and risk-adjusted performance of private credit funds, as well as the need for greater transparency and alignment of interests between fund managers and investors. As the private credit market becomes increasingly crowded and competitive, managers will need to demonstrate their ability to generate attractive risk-adjusted returns net of fees to justify their value proposition to investors.
6. Barclays and AGL Launch Private Credit Partnership Backed by ADIA
In a move that highlights the growing convergence between traditional banks and private credit managers, Barclays Plc and AGL Credit Management have entered into a cooperation agreement to originate private credit loans, with backing from the Abu Dhabi Investment Authority (ADIA).
Under the terms of the agreement, AGL will have exclusive access to Barclays’ deal flow and a first look at every deal the bank originates that includes a private credit option, though with no obligation to participate. ADIA has committed $1 billion to AGL’s first private credit fund, which, including leverage, will have over $2 billion of capital available to deploy.
The partnership reflects the evolving dynamics of the private credit market, as large Wall Street banks seek to adapt to the growing prominence of direct lenders by forging alliances and offering borrowers a wider range of financing options. For AGL, the collaboration with Barclays is expected to provide a competitive advantage by offering greater access to information and deal flow than other pure-play direct lenders and asset managers.
As the lines between traditional banks and private credit managers continue to blur, such partnerships may become increasingly common, reshaping the competitive landscape and offering new opportunities for borrowers and investors alike.
7. Genstar-Backed Telestream Seeks $400 Million Private Debt Deal
In another example of private credit’s expanding role in supporting private equity-backed companies, Genstar Capital-backed Telestream is seeking to raise around $400 million from direct lenders to pay down existing debt. The company, which provides digital video software and workflow technology for content owners, creators, and distributors, is considering a mix of junior and senior debt for the refinancing.
Telestream’s capital raise is indicative of the growing appetite among private equity sponsors to tap into the private credit market for flexible and customized financing solutions. As competition among direct lenders intensifies, borrowers are increasingly able to secure attractive terms and pricing, while also benefiting from the speed and certainty of execution offered by private credit providers.
The deal also highlights the potential for private credit to support the growth and expansion of technology-focused companies, particularly those backed by experienced and well-capitalized private equity sponsors. As the digital transformation of various industries continues to accelerate, private credit is likely to play an increasingly important role in financing the next generation of innovative and disruptive businesses.
Conclusion
The private credit market continues to evolve and adapt to the changing needs of borrowers and investors, with a mix of record-breaking deals, shifting strategies, and potential headwinds shaping the industry’s trajectory. From the mega-sized Catalent and Saks-Neiman Marcus financings to the fundraising challenges faced by mid-tier and less-established managers, this week’s Private Debt News highlights the dynamic and complex nature of the private credit landscape.
As the market navigates the competing forces of robust deal activity and signs of a potential cooldown in fundraising, private credit managers will need to remain agile, innovative, and focused on delivering compelling value propositions to both borrowers and investors. Those who can successfully differentiate themselves through specialized expertise, strong performance, and flexible financing solutions will be best positioned to capitalize on the opportunities and overcome the challenges that lie ahead.