The good news for private credit lenders: They’re getting to work on a record number of deals. The bad news: Rising dealflow hasn’t brought them the billion-dollar deals they covet most.
The industry inked 252 deals in Europe in the three months through July 1, its biggest quarter ever, according to the Deloitte Private Debt Deal Tracker. That growth was fueled by relatively small fundraises for companies that earn less than €75 million ($82 million), according to separate data from Wells Fargo & Co., which shows stagnant volumes for deals from higher earners.
Downsized deals are just another symptom of the bigger problem besetting the $1.7 trillion private credit industry. Direct lenders have a surplus of cash while they face a drought of big acquisitions. All the while, new entrants are crowding into the market, hoping to get in on fee-rich, but still elusive deals.
Easier rate policy may open the floodgates for merger activity — but what’s not yet clear is whether that will translate into more trophy deals like the €4.5 billion loan to back the buyout of Adevinta or the $3.3 billion private credit loan for U.K. insurance broker Ardonagh Group.
In the meantime, direct lenders have uncovered a swell of middle-market companies hungry for their cash, even if smaller deals can be riskier and more time-consuming.
“Market perception is that we have now turned a corner from peak interest rates and inflation,” said Laura Vaughan, head of direct lending at Federated Hermes. “All of this sets a scene for the postponed M&A activity for the last 18 months to flow through quickly in the coming quarters.”
While all companies benefit from lower interest rates and lower inflation, larger ones have their choice of lenders — from the private or broadly syndicated markets. The latter has staged a major comeback this year, as banks reclaimed $30 billion of loans they’d lost to private funds, according to Bank of America Corp.
“Banks are back underwriting deals and competing aggressively,” said Ben Davis, partner and head of private credit at law firm Eversheds Sutherland.
In recent weeks, borrowers have been ditching private debt for public leveraged loans. K2 Insurance Services, Circor International and Alegeus Technologies all initiated a switch to lower their borrowing costs. K2 upsized its term loan by $35 million, and may sell it soon. Circor’s $650 million term loan priced at 3.5 percentage points over the Secured Overnight Financing Rate, lower than the rate on its 2023 private credit deal, which was 6 percentage points over the benchmark rate.
However, Alegeus’ leveraged loan offering was shelved by Bank of America. Alegeus is doubling back to direct lenders to line up a new loan, Bloomberg reported.
In Europe at least, private lenders have another reason to be hopeful: ultra-rich investors in the U.K. may start dumping shareholdings targeted for tax hikes under the budget due Oct. 30. The U.K. is still home to the largest number of private credit deals in Europe, according to the Deloitte report.
“Many founders and owners of U.K. mid-market businesses who were in two minds about selling their stakes are seriously considering doing so now, due to the uncertainty around wealth taxes for high-net-worth individuals which could be introduced,” said Nick Holman, head of U.K. and Ireland at private credit firm Kartesia.