Junior debt set for resurgence
As senior lenders become more cautious, there is an opportunity for junior capital to fill in the gaps in the market, according to Churchill Asset Management’s Jason Strife.
Many started 2025 thinking that there would be a rebound in activity and private equity firms would be able to exit some of their holdings, but this has not materialised yet.
“Today’s elevated levels of uncertainty make it difficult to sell anything other than what we would define as a very ‘high quality’ asset,” said Strife, who is head of junior capital & private equity solutions at Churchill.
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“So, you have this huge portfolio of private equity companies that in many instances are five to seven years old, and in many cases the private equity firms are still aligned with their lenders and their investors, in that they want to generate a return, but it’s taking longer.”
Combine that with a more cautious senior lending environment, upcoming maturities and a lending fatigue, it is a period where junior capital can really shine, in his view.
He’s not the only one highlighting the opportunity in junior capital. Earlier this year, Bloomberg reported that HPS was seeking over $10bn (£7.5bn) for a junior debt fund, which would be among the largest so far in private credit this year.
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But although Strife believes junior capital solutions can offer interesting opportunities to investors, 2024 saw a flight to safety, with a sharp rise in direct lending fundraising, versus a “dearth of interest” in junior capital, according to PitchBook.
Still, Strife added that in many instances portfolio companies lost one to three years due to the impact of Covid, which the market has not really appreciated.
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“We’re in a period where I think private equity firms should really be exploring what the art of the possible is with their capital structure, ultimately creating better prospects for the business to grow into a return,” he said. “And if you need to reset the capital stack, bring in some junior capital, create more time for the business and ultimately more breathing room, then hopefully that enables the company to have better prospects to prosper.”
He also said that the team is “keenly focused” on the level of adjustments to EBITDA, making sure that the portfolio company’s cash flow, which is servicing a higher cost of the capital structure, is very clean and that the earnings can support interest coverage ratios and fixed charge coverage ratios.
Although he says that’s always been a focus, it’s “a heightened necessity to transacting today”, he noted.
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