Private equity firms lend less as demand cools
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[March 04, 2023] By
Chibuike Oguh
(Reuters) - Private equity firms that have for years capitalized on the
regulatory woes of banks by becoming lenders to risky leveraged buyouts
are doing less business just as higher interest rates have made that
practice more lucrative.
Buyout firms with direct lending businesses, such as Blue Owl Capital
Inc, Blackstone Inc and Apollo Global Management Inc, disbursed a total
of $151.3 billion in 2022 for so-called middle-market deals -- midsized
acquisitions by private equity firms -- according to financial data
provider Refinitiv.
That was 23% less than the $195.7 billion lent out in 2021, but still
41% higher than in 2020. The amount of loans disbursed by direct lenders
so far in 2023 has not shown any pickup, the Refinitiv data shows.
Seven private credit executives interviewed by Reuters attributed the
drop to fewer companies knocking on the door of direct-lending private
equity firms, with the financing turning more expensive, and the lenders
becoming more-risk averse amid concerns about a potential economic
slowdown.
Limited bank financing for leveraged buyouts is dissuading many
potential borrowers from pursuing deals in the first place and, as a
result, fewer of them are knocking on the door of private equity firms
as lenders, the executives added.
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"There's less mergers and acquisition activity in the market because
there's limited public financing," said Marc Lipschultz, co-president
and co-founder of Blue Owl Capital Inc.
The total value of leveraged buyouts in the United States fell 32%
year-on-year to $345.6 billion in 2022, down from $507.6 billion in the
previous year, according to Refinitiv.
Also weighing on deal volumes is the cost of borrowing from private
equity firms. Such a loan has always been more expensive than a
traditional bank loan, yet dealmakers still opted for it when banks
faced regulatory constraints in saddling a company with a lot of debt.
The cost of this loan has recently soared amid higher interest rates. A
$1 billion loan from a private equity firm for a company rated
non-investment grade - or junk - now averages an interest rate of up to
12%, up from around 7.5% average in 2021, one of the executives
interviewed by Reuters said. This has dampened demand for loans from
private equity firms.
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Milwood Hobbs, head of North American private credit sourcing at
Oaktree Capital, said some borrowers are opting to delay refinancing
and repaying their outstanding loans because of the higher costs of
a new financing. This has restricted the ability of some direct
lenders to replenish their capital so they can finance new deals,
Hobbs added. "It's been taking more lenders and more time to club up
a deal," he said.
For their part, private equity firms have also become more
risk-averse when it comes to lending, as the economic slowdown and
sticky price inflation erode the credit worthiness of some
borrowers.
"The slowdown [in direct lending] is due to uncertainty about the
economic outlook and interest rates, the continued disparity on
valuation expectations and some seasonal factors, rather than a lack
of debt capital available,” said Kipp deVeer, head of credit at Ares
Management Corp.
DEBT FUNDS LAUNCHES HIT
The drop in direct lending business has spilled over into
fundraising for vehicles that provide the pools of capital for the
loans. U.S. private debt funds raised $216.2 billion in 2022, down
6% from the year before, according to data provider Preqin.
To be sure, major deals using private equity firms as lenders are
still getting done as banks have continued their retrenchment from
risky debt. In 2022, direct lenders backed Vista Equity Partners in
its $8.4 billion acquisition of U.S. tax accounting software company
Avalara Inc as well as its take over of cybersecurity firm Knowbe4
Inc for $4.6 billion. Thoma Bravo's deal to acquire Ping Identity, a
cybersecurity firm, for $2.8 billion was also financed exclusively
by private credit firms.
"The absolute number of direct lending loans has come down but our
market share in the financing market has gone up," Lipschultz said.
(Reporting by Chibuike Oguh in New York; Editing by Diane Craft)
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