The challenges faced by traditional banks over the past 12 months have proven to be golden opportunities for private lending.

The words “sophisticated capital”, “alternative capital” and “private credit” once carried at least a hint of different meanings. However, these words now seem to have converged to refer to non-bank loans (in the traditional sense) extended directly to a borrowing business unit, for example, debt issued by private equity firms, specialist finance companies, funds speculative, etc. .

These loans once had a limited range of uses or were linked to areas of financial difficulty due to their higher price, but now they dominate the private equity markets and in (among other areas) equity investment and leveraged buyouts, plus they have increased relevance in the corporate space. Private credit has gone from supplementing the traditional commercial lending industry to taking market share and, in some cases, even supplanting these traditional lending houses.

Today is arguably a golden age for this asset class, as traditional banks, battered by the financial crisis and the increased regulation that followed, have gradually avoided certain types of risk and been forced to operate without the flexibility on terms and capital structuring offered by private credit. By contrast, private credit managers have become more sophisticated, as they are able to participate in a wide variety of complex structures and less traditional business types, providing flexibility on terms and greater speed of execution and pricing.

The opportunities are now attractive, perhaps even compelling, for companies and private equity firms. A number of private equity players are now building successful private lending businesses, not only providing investors with another opportunity for return, but also potentially creating an independent yet friendly anchor investor for future business.

During the first quarter of 2020, as a few infections evolved into a true global pandemic, certain sectors faced significant challenges. Some of these sectors were under considerable pressure even before the pandemic; retail, for example, was already struggling to adapt to changing consumer spending habits. In the second and third quarters of 2020, banks found themselves inundated with the trio of government backed paper, inconsistent regulatory messaging and significant pressure to fund guns, not to mention the wallet pressure that always arises. in times of uncertainty.

As traditional lending overcame these challenges, private credit markets were white-hot, reacting quickly to their portfolio, but also anticipating the vast liquidity available. The growing ability of credit funds to execute larger and more complex transactions without market or syndication risk has led to an increase in large-cap activity for private credit.

Private credit offers increased confidentiality and greater certainty with a faster turnaround time.

Private Credit has worked proactively with existing customers to navigate the turmoil, even underscoring the strength and value of relationships and partnerships with their customers. An industry previously feared to be behaving like vulture capital was showing patience and nursing its reputation. This boosted the confidence of private capital and corporate borrowers. It wasn’t just the size or the ability to execute that impressed everyone, it was the true nature of patient capital, which became evident, and the flexibility, will and creativity in structuring that provided borrowers with real solutions, whether through regular credit performances, the flexibility of stretched leverage or “specialized” loans.

Increasingly, private equity firms looking to fund large leveraged buyouts are turning less and less to traditional lenders. Recent examples of larger market moves through private credit include the US$2.6 billion transaction on stamps.com or the US$2.3 billion loan for the Calypso Technology takeover. Inc. Just a few years ago, these loans rarely exceeded US$500 million and we can now see more deals from Premier Sponsors for Premier Loans “pairing” a number of private lenders to provide giant funding.

From an investment perspective, private credit offers a strong opportunity.

Despite the low interest rates that make secured loans cheap, traditional financing remains a popular avenue for financing buyouts; for the right credit, with the right leverage, banks can always be the cheapest option. Nevertheless, the loans and bonds that banks underwrite are usually sold to a large group of lenders in the form of secured loan obligations, or to other institutions, and are therefore priced according to this market. Any change in investor sentiment or socio-economic nervousness can alter the certainty of execution or even the financing terms of a transaction. Pricing can be affected at both ends, either by making debt expensive or by making it cheap enough to allow even struggling investors to buy. Neither is attractive for private equity. Additionally, private credit offers increased privacy and greater certainty with a faster turnaround time for obtaining financing. While there may be an additional cost for private credit, buyout companies are willing to pay for certainty, speed, flexibility, and their growing relationship.

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