Three Things (9/14)

Wednesday, Sep 14th 2022

Commentary

Direct lenders invading M&A

“I skate to where the puck is going, not where it has been.“ - Wayne Gretzky


1) Direct lenders invading M&A: While leverage bank loan deals fell by 49% in the first half of 2022, direct lenders completed 22% more transactions in the first half of 2022. Direct lenders and alternative asset giants' foray into the space comes as big banks try to unwind commitment for buyout loans that, after the market flipped earlier this year, ended up priced inconsistently with prevailing rates. 

Titan’s Takeaway: Private credit is typically more expensive than broadly syndicated loans but as yields have risen in loan and bond markets, that gap has narrowed. In the tense negotiations of an M&A transaction, the companies involved want two things: speed and certainty; and if direct lending becomes more competitive on price, who knows where the industry can go.


2) Private credit moves to asset-backed loans: With interest rates rising and an uncertain macro outlook, direct lenders are shifting strategies away from reliance on the company’s cash flows and into asset-backed investments, which are generally a hedge against inflation. In July, KKR closed its first asset-based debt fund, which makes privately originated credit investments.

The change in lending patterns for private credit protects investors in the face of market volatility. With advanced contractual cash flow and covenants in place, we expect this trend to persist so long as market volatility continues.

3) Fidelity unveils private credit fund: The Boston-based asset manager plans to create a private credit fund that aims to lend to smaller firms. The new fund is expected to raise between $100 million and $1 billion. The fresh fund loosens some requirements for investing in PE, VC, and hedge funds, but stipulates that an investor must have a gross income of $70,000 per year or a net worth of $250,000. Net fees will range from 4.89% to 5.74%, plus a performance fee of 12.5% each quarter over 5% growth. 

Titan's Takeaway: Interest in private credit is accelerating across capital markets, and Fidelity's entry into the space speaks to their confidence in the alternative asset class. While Fidelity’s fees seem steep, we welcome access to these alternative assets in which retail investors have historically been overlooked.


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