Private Credit - recent market activity and insights

As we venture to the mid point of 2024, the private credit landscape is undergoing a transformation. With traditional banks scaling back lending to smaller enterprises, opportunities in asset-based lending are flourishing. VettaFi Advisor Perspectives sheds light on this shift, emphasizing the resilience of asset-based lending during economic downturns.

From the chart below the number of FDIC-insured commercial banks in the US continues to shrink.? With this trend and tightened bank lending, private credit investors are finding substantial opportunities in asset-based lending.

Private credit investors can take advantage of these opportunities and carefully choose investments to create strong portfolios. Exhibit B highlights the significant growth expected in asset-based finance in the coming years, indicating a promising environment for expansion and innovation in the financial sector.

In Europe, senior secured lending is becoming more attractive for private credit investors due to wider spreads compared to the U.S., offering higher returns and yields (see Exhibit C). This market appeal is enhanced by a recent funding gap caused by the exit of a major European private credit manager and significant tax advantages for non-U.S. investors. These factors make European senior secured lending a compelling option for investors seeking diversification and maximized returns in a dynamic market environment.

Despite uncertainties, private credit continues to captivate investors, offering avenues to leverage bank retrenchments, navigate market competition, and explore European prospects for sustained success.

Meanwhile, in a discussion with Pensions&Investments , Timothy Lyne, CEO of Antares Capital, shares invaluable insights into the current state of private credit and direct lending. While the resurgence of the broadly syndicated loan market has led to spread compression, core middle market direct lending remains resilient, offering attractive risk-adjusted returns amidst intensifying competition.

The continuation of spread compression largely depends on the future of M&A activity. An increase in M&A-related issuance could theoretically improve the loan supply-demand balance, leading to spread stabilization or even widening. In 2024, private equity M&A investment activity has slightly recovered year-over-year but remains relatively low. Looking ahead, it’s anticipated at least modest growth in M&A volume in 2024, with a potential surge in 2025-26. This expected increase is driven by record levels of private equity dry powder, growing pressure on general partners to return capital to limited partners, a large backlog of M&A transactions, and eventually lower interest rates.

What are your thoughts on these trends?

More News

• Major banks, once threatened by private credit, are now investing billions into the sector. Bloomberg reports . For instance, Goldman Sachs, Citigroup, and Wells Fargo plan to allocate over $50 billion to private credit. Banks diversify their approaches, using existing debt franchises, balance sheet funds, and partnerships to access borrowers and capital. Banks see fee-earning opportunities and client retention in private credit despite potential conflicts with traditional lending. However, CEOs like Citigroup's Jane Fraser and JPMorgan's Jamie Dimon warn of risks, especially with retail clients accessing less liquid products. Yet, banks may face challenges deploying funds amid subdued loan demand and high dry powder levels in private credit funds.

• Global regulators are monitoring the rising adoption of private credit by life insurers , with regulations differing across regions. Moody's examined regulatory frameworks in the US, Bermuda, Europe, and Japan, influencing insurers' investment approaches. While private credit is gaining traction, notably in the US and Bermuda, European and Japanese insurers lean towards sovereign bonds and equities. Regulatory adjustments are ongoing, but uncertainties persist, prompting a closer examination of reinsurance and private credit assets. Stricter regulations for private credit may be implemented in the US and Bermuda, while Europe explores ways to encourage investment diversification.

• Ninepoint Partners has suspended cash distributions for three private credit funds and intends to review the situation again in the third quarter of 2024. This action has sparked concerns regarding the potentially inflated market, valued at US$1.7 trillion. While major banks are ramping up their investments in private credit, JPMorgan chief Jamie Dimon cautions about potential risks, particularly with the entry of retail investors into the market.

A few deals in market…..

• Trinity Capital Inc. (NASDAQ: TRIN) ("Trinity"), a leading provider of diversified financial solutions to growth-oriented companies, today announced the commitment of $15 million in growth capital to restor3d , a 3D printing, patient specific medical device company.

• ATEL Ventures, Inc., a division of ATEL Capital Group and a provider of venture debt financing solutions to growth-stage companies, today announced the completion of an agreement to provide $20M of growth debt to Isar Aerospace, a launch service provider for small and medium-sized satellites.

• Dresser Utility Solutions , a leading provider of global infrastructure technology for the energy transition including measurement, instrumentation, coupling and repair, pressure and flow control solutions to water and gas utility and industrial customers, and a portfolio company of First Reserve, has secured a $335 million credit facility from funds managed by Blue Owl Capital's Credit platform.

• Austin Financial Services (AFS) secured a $10 million ABL facility for a food service equipment manufacturer and distributor, featuring an accounts receivable and inventory revolver. This loan refinances the company's bank debt and offers working capital for expansion. AFS president Jason Anish emphasized their dedication to providing flexible financing solutions to aid business growth and manage vendor obligations.

• Celtic Capital granted a $3.5 million accounts receivable line of credit and a $1.53 million equipment loan to meet the needs of its newest client—an oil and gas extraction services company located in the Western Midwest. Hindered by decreased revenues during the COVID era, the company required extra working capital to recover. With its current bank unwilling to provide the necessary funds, management sought assistance from Celtic Capital.

• Grant Thornton and New Mountain Capital have finalized a substantial growth investment in Grant Thornton , with additional minority investments from CDPQ and OA Private Capital. This collaboration seeks to improve technology and service offerings to broaden client engagement. Grant Thornton remains dedicated to delivering exceptional client service while maintaining an alternative practice structure.

If you're interested in discussing deals within the private credit realm, feel free to get in touch at any time.

You can learn more about my firm here, Axis Group Ventures .

All the best - Tim

[email protected]

#privatemarket #secondaries #venturecapital #privatecredit #privateequity