“Obviously, rising interest rates put an additional burden on companies’ debt service. But for our portfolio borrowers, they continue to realize positive revenue and EBITDA growth, albeit at a decelerating rate. The U.S. economy remains resilient, and with consumer confidence at a two-year high, consumer spending continues to drive growth.”
Certain sectors, such as software and business services, continue to do well because of recurring demand, Lindblad said. Opportunities also exist in health care, although some subsectors, such as physician management practices, are affected by tight labor conditions, increased wage costs and other inflationary pressures. “There’s been burnout among some health-care providers, and consequently, filling open spots has been challenging and wages have increased. And when you’re dealing with large payers, such as the larger insurance companies or Medicare, it’s more difficult to pass on those price increases,” he said. The outlook is improving as COVID pandemic impacts recede and labor availability starts to improve, he added.
The consumer retail segment needs careful consideration as well. “We see some improvement as retailers’ inventories normalize and, therefore, companies selling into the retailers will have revenue in line with historical experience,” he said. “But there could be some sectors or goods where consumer preference has shifted and that may continue to be adversely impacted,” he added. “Demand may not normalize for certain suppliers as consumer behavior has shifted from goods to experiences.”
In addition, the aerospace and defense sectors continue to be impacted by supply-chain issues, though a rebound in travel has resulted in increasing orders and backlogs for airplane manufacturers.
Fundamental support
A perfect storm of tailwinds powering private credit has accelerated in the last 12 to 18 months. “Private equity sponsors have started to prefer the certainty, flexibility, reliability and confidentiality that a private credit solution can provide,” Lindblad said. “In addition, private credit deal sizes are increasing.”
Further, many private equity sponsors paid upfront for their portfolio companies, and a central part of their investment thesis involves add-on acquisitions, Lindblad said. “That provides a tailwind from a deployment standpoint alongside the dry powder private equity firms are sitting on that will be available for new investment,” he noted.
Although some investors may be concerned with the sharp decline in mergers and acquisitions this year, Lindblad said it’s a short-term dynamic because the valuations disconnect between buyers and sellers will be resolved at some point. “Once there is more certainty on where the U.S. economy is going, M&A activity will pick up,” he said. “Right now, sellers and buyers are not transacting. Sellers’ value expectations exceed what buyers are willing to pay, particularly given the increased cost of debt, but they can only hold on to these businesses for so long. They need to return capital to their investors.” Antares Capital anticipates an improvement in the M&A leveraged buyout market in 2024, which would further support the private credit sector.
A sweet spot
Asset owners have been deploying significant dollars into private credit as the sector continues to provide a strong risk-reward profile.
In addition, “when you look at the current vintage, the spreads and fees that we’re receiving on new transactions are very attractive relative to historical averages. The leverage profile has also declined to more normalized levels, the amount of equity that sponsors are putting in to support transactions is at an all-time high, and terms and conditions have swung from an issuer-friendly perspective to a more lender-friendly perspective,” he said.
“When you look at it from a business standpoint, investors may conclude this is a very attractive time to invest in private credit,” Lindblad said.
A resilient approach
Maintaining portfolio resilience across market environments starts with a strong originations platform and is followed by an active portfolio management and credit team. “We have built long-standing and institutionalized relationships with private equity sponsors over many years,” he said. “This is key because it enables you to generate significant deal flow. From that, you can choose the best credits: We only close on about 4% of the new opportunities that we see. That initial credit decision is key to strong portfolio quality.”
For more than 25 years, Antares Capital has followed a consistent strategy of providing first-lien, senior secured debt to companies owned by private equity sponsors. “We continue to focus on lending to market-leading companies and noncyclical sectors, where companies have diversified customer and supplier bases and generate stable cash flows. That’s been very helpful from a resilience standpoint,” Lindblad said.
Another key differentiator for Antares Capital is its strong workout team, which is always at the ready. “To the extent that portfolio companies do experience issues, sponsors have the wherewithal and will often inject additional capital to support their businesses and will change management or cut expenses to preserve cash flow. That dynamic is unique to our asset class and is critical to making sure that default rates and losses remain manageable,” he added.
