Pick-up in dealmaking presents new opportunities for private credit managers
Private equity firms are finally back in the market and hunting for deals, which should help private credit managers in the coming months.
Private equity activity saw its strongest quarter in two years in the second quarter of 2024, according to EY, with groups announcing 122 deals worth $196bn (£151.2bn) in total, up from $100bn in the first quarter. This was the strongest period for capital deployment since the third quarter of 2022, EY said in its report.
As dealmaking slowed down so did the deployment of private credit funds, which heavily rely on buyout sponsors for new deals.
Looking forward, Callum Bell, head of direct lending at Investec, expects to see more opportunities in the second half of the year, but warns that the market is still way off the levels of activity seen in previous years.
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“A pickup in M&A is a positive tonic for private credit managers and helps support a more balanced supply and demand and therefore growth,” he said.
“This pick-up is being supported by some structural tailwinds coming from lengthening PE hold periods and LPs’ desire to recycle capital into new opportunities, both of which will result in an increase in M&A activity.
“While it’s a step in the right direction, we’re not in the territory of a buoyant M&A market. We are seeing a decent amount of activity in M&A and sponsor pipelines which provides me with confidence around the outlook. And, ultimately, deals attract deals so any signs of positivity should be welcome.”
Marc Chowrimootoo, a portfolio manager and co-head of direct lending for private credit at Hayfin, said he started seeing a gradual return of M&A at the end of 2023 that has continued into this year – a trend he expects to continue.
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“We certainly welcome this uptick in activity; it’s good for the overall market,” he said. “But the market remains competitive. Given our focus across both the mid and upper-mid market, we have been fortunate not to need this cyclical upturn to deploy our capital on sensible terms.
“Within a competitive market environment, it is better that private credit managers remain disciplined and continue to invest in line with their investment strategy, rather than being pulled into a race to the bottom on pricing or terms.”
He added that although the rebound in buyout volumes is good news for alternative lenders, the broadly syndicated loan market has also come back, which means that there is rising competition for upper mid-market borrowers, with banks often providing tighter spreads and more flexible documentation.
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