(Corrects title of Marc Lipschultz in sixth paragraph)
By Chibuike Oguh
March 3 (Reuters) - Private equity firms that have for
years capitalized on the regulatory woes of banks by becoming
lenders to risky leveraged buyouts are doing less business just
as higher interest rates have made that practice more lucrative.
Buyout firms with direct lending businesses, such as Blue
Owl Capital Inc , Blackstone Inc and Apollo Global
Management Inc , disbursed a total of $151.3 billion in
2022 for so-called middle-market deals -- midsized acquisitions
by private equity firms -- according to financial data provider
Refinitiv.
That was 23% less than the $195.7 billion lent out in 2021,
but still 41% higher than in 2020. The amount of loans disbursed
by direct lenders so far in 2023 has not shown any pickup, the
Refinitiv data shows.
Seven private credit executives interviewed by Reuters
attributed the drop to fewer companies knocking on the door of
direct-lending private equity firms, with the financing turning
more expensive, and the lenders becoming more-risk averse amid
concerns about a potential economic slowdown.
Limited bank financing for leveraged buyouts is dissuading
many potential borrowers from pursuing deals in the first place
and, as a result, fewer of them are knocking on the door of
private equity firms as lenders, the executives added.
"There's less mergers and acquisition activity in the market
because there's limited public financing," said Marc Lipschultz,
co-president and co-founder of Blue Owl Capital Inc .
The total value of leveraged buyouts in the United States
fell 32% year-on-year to $345.6 billion in 2022, down from
$507.6 billion in the previous year, according to Refinitiv.
Also weighing on deal volumes is the cost of borrowing from
private equity firms. Such a loan has always been more expensive
than a traditional bank loan, yet dealmakers still opted for it
when banks faced regulatory constraints in saddling a company
with a lot of debt.
The cost of this loan has recently soared amid higher
interest rates. A $1 billion loan from a private equity firm for
a company rated non-investment grade - or junk - now averages an
interest rate of up to 12%, up from around 7.5% average in 2021,
one of the executives interviewed by Reuters said. This has
dampened demand for loans from private equity firms.
Milwood Hobbs, head of North American private credit
sourcing at Oaktree Capital, said some borrowers are opting to
delay refinancing and repaying their outstanding loans because
of the higher costs of a new financing. This has restricted the
ability of some direct lenders to replenish their capital so
they can finance new deals, Hobbs added. "It's been taking more
lenders and more time to club up a deal," he said.
For their part, private equity firms have also become more
risk-averse when it comes to lending, as the economic slowdown
and sticky price inflation erode the credit worthiness of some
borrowers.
"The slowdown [in direct lending] is due to uncertainty about
the economic outlook and interest rates, the continued disparity
on valuation expectations and some seasonal factors, rather than
a lack of debt capital available,” said Kipp deVeer, head of
credit at Ares Management Corp .
DEBT FUNDS LAUNCHES HIT
The drop in direct lending business has spilled over into
fundraising for vehicles that provide the pools of capital for
the loans. U.S. private debt funds raised $216.2 billion in
2022, down 6% from the year before, according to data provider
Preqin.
To be sure, major deals using private equity firms as
lenders are still getting done as banks have continued their
retrenchment from risky debt. In 2022, direct lenders backed
Vista Equity Partners in its $8.4 billion acquisition of U.S.
tax accounting software company Avalara Inc as well as its take
over of cybersecurity firm Knowbe4 Inc for $4.6
billion. Thoma Bravo's deal to acquire Ping Identity, a
cybersecurity firm, for $2.8 billion was also financed
exclusively by private credit firms.
"The absolute number of direct lending loans has come down
but our market share in the financing market has gone up,"
Lipschultz said.
(Reporting by Chibuike Oguh in New York; Editing by Diane
Craft)
Messaging: chibuike.oguh.thomsonreuters.com@reuters.net))
