Private credit firms are encroaching on the business of investment banks even further — by increasing their share of lending for take-private deals.
(Bloomberg) — Private credit firms are encroaching on the business of investment banks even further — by increasing their share of lending for take-private deals.
Private debt managers at Blackstone Inc. and Goldman Sachs Asset Management this month led a £1.25 billion ($1.58 billion) deal to support EQT AB’s acquisition of Dechra Pharmaceuticals Plc, beating banks to a deal that was the biggest European take-private of the year.
Barings LLC, meanwhile, provided a chunk of the debt backing IK Investment Partners Ltd’s deal for telemedicine firm Medica Group Plc in April.
There are other prospective public-to-private deals in the works with direct lenders looking to be involved in financing, four people with knowledge of the matter said.
The financing for taking public companies into private ownership has traditionally been the business of banks. But with deal processes taking upwards of six months, and market volatility and interest rate hikes continuing, some banks are getting more selective about which deals to finance for fear that they won’t be able to sell on the debt to investors after the transaction closes.
That’s created an opening for the $1.5 trillion private credit industry. Direct lenders have already been involved in big take-private deals in the US — including the buyout of software maker Zendesk Inc. — but it’s a newer growth area for the industry in Europe. Direct lenders in the region have mostly been focused on buyout financing for unlisted company deals so far.
Direct lenders’ involvement in take-private deals is also a reflection of a wider trend in M&A. While deal activity globally is foundering amid disparate price expectations and difficult financing markets, public-to-private deals are becoming more attractive because they are easier to value. That’s because valuations are based on the public share price, and less subjective than in deals involving unlisted companies.
“Private debt markets are attractive as a funding source for public-to-privates because they can provide certainty of price, more structural flexibility, confidentiality and swift execution,” said James Reynolds, global co-head of private credit at Goldman Sachs AM.
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There’s currently more take-private processes in the European pipeline than at any point over the past five years, the people familiar with the deals said. On Thursday, Bain Capital offered to buy SoftwareOne Holding AG for $3.2 billion — another potential take-private in Europe’s software sector after Silver Lake Management targeted Software AG earlier this year.
To be sure, only a handful of the largest direct lending funds have enough firepower to lead big take-private transactions, so the new opportunity will likely only benefit the biggest players in the industry, like Blackstone, Goldman Sachs AM and Ares Management Corp.
For the direct lenders involved in the Dechra take-private, leaked news about the deal provided an opening for more of them to get involved and form a syndicate. UK dealmaking regulations stipulate that companies can only talk to a maximum of six other parties — including banks and financial advisers — about potential deals. However, after news about the transaction came out, more parties were able to get involved.
Private credit’s growing influence may mean that it increasingly features as one of the six in the UK.
(Updates with comment from Goldman Sachs AM in eighth paragraph.)
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