Private Equity Firms Cut Wall St Banks To Fund LB …
(MENAFN – Gulf Times) Increasingly, private equity firms seeking to fund large leveraged buyouts (LBOs) are wiping out Wall Street banks and borrowing money from each other or from lenders direct.
Private equity firm Thoma Bravo bypassed the banks by securing $ 2.6 billion in debt financing for its July takeover of Stamps.com and a $ 2.3 billion loan for the takeover of Calypso Technology Inc in April. At the start of 2019, these loans rarely exceeded $ 500 million. But the funds that provide them are swelling and the financing offered increasingly exceeds $ 2 billion.
“What is possible in terms of size has become much more important,” said Tom Connolly, co-head of the private credit investment business at Goldman Sachs Asset Management. “What’s new right now is the ladder.”
These loans often come from the credit arms of private equity firms or stand-alone direct lending funds. The appeal of this buyout financing is that the process is easier and sometimes lenders will offer more debt. But for banks, the deals threaten one of Wall Street’s most profitable businesses: leveraged finance, where groups of banks arrange junk loans and bonds to fund private equity deals.
The resulting potential pain for the banks could be severe. Leverage financing generates about a third of Wall Street’s investment banking fees, and now many direct lenders compete for these transactions alongside the big banks. One strategist estimates that direct lenders could grab up to a tenth of the loan portion of this business over the next few months.
Direct loans often take the form of unitranche finance, which includes elements of conventional loans and unsecured debt. A dozen companies make unitranche loans of this size, usually as part of a small group, including Blackstone Group Inc, Apollo Global Management Inc, Ares Management Corp, Blue Owl Capital Inc, KKR & Co, Goldman Sachs Asset Management and Golub Capitale. To privatize Stamps.com, Thoma Bravo called on Blackstone, Ares, PSP Investments and her own credit firm for a $ 2.6 billion loan. The debt was structured as a unitranche and was the largest such transaction on record.
Direct lending funds now sometimes give private equity firms more leverage than they could get in the syndicated loan market, and funding can be faster, potentially reducing transaction time from four to five weeks. . The direct lending route can also be easier for the borrower and may ensure that few other parties find a deal.
Of course, syndicated loans historically had lower yields and terms known as covenants were more flexible, allowing banks to win deals. But that is changing in some cases: some of the larger direct finance loans no longer require the borrower to meet performance tests over time, to compete with the so-called covenant-lite loans that go through them. banks. And the premiums on direct loans are falling more and more, making their returns more competitive with their unionized counterparts.
“It’s confidentiality, it’s speed, it’s certainty, knowing up front what terms you’re getting,” said Laura Holson, head of capital markets at New Mountain Capital, which helps the firm. investment capital to find financing for its buyouts. may be more effective to have a small handful of groups to go out as opposed to a unionized deal where you could have a group of 20, 30 and more. That’s a lot of cats to keep.
In the early days of buyout financing, private equity firms relied primarily on banks for safer senior debt, as well as credit funds for riskier parties and public markets for larger deals. Then, after the financial crisis, banks cut back on LBO loans because regulatory changes made it more onerous for them to maintain debt. For larger buyouts, investment firms managing guaranteed loan bonds provided more funding, with banks remaining mainly involved as intermediaries.
For small transactions, direct lenders stepped in to provide funding directly to private equity without the banks intervening, and then began funding larger transactions that would have struggled to sell in public markets. But now they’ve made bigger deals that could easily have been sold in the largely syndicated loan market, which means funds are increasingly gnawing at the heart of Wall Street banks’ business.
In many transactions, private equity firms consider both syndicated loans and direct financing to see what will work best for them. Veritas Capital considered both possibilities before opting for a private $ 2.15 billion unitranche for a Cambium Learning Group Inc recapitalization, according to people familiar with the matter.
Thoma Bravo has had discussions with banks and direct lenders for Stamps.com, the people said. Medline Industries gets around $ 17 billion in debt financing as part of its buyout, which was too big for private credit to be pulled out on its own, but at least one company has competed with banks for some of the debt. , according to a person familiar with question.
“Simply put, the direct lending market is taking a share of the largely syndicated market,” said David Golub, president of Golub Capital, a direct lender.
Sometimes direct finance investors are willing to take more risk than their syndicated loan counterparts. For example, in the Stamps.com buyout, the debt is more than eight times a measure of income known as earnings before interest, taxes, depreciation and amortization, according to people familiar with the matter.
This is more than what would likely be possible in the loan market, the people said. And borrowers only pay a little more than they would for comparable syndicated loans, according to one.
Historically, direct loans have had higher returns than leveraged loans, but increasingly unitranche jumbo transactions pay similar levels.
“Private credit providers will abide by covenants and push leverage beyond what banks are willing to go for regulatory reasons,” said Randy Schwimmer, senior lending co-head at Churchill Asset Management , a direct lender. “And they’ll process faster, with price certainty. It’s hard to match.
Ares CEO Michael Arougheti expects distribution units of up to $ 5 billion in the near future, but not in 2021.
Blue Owl co-chair Marc Lipschultz said the market has sufficient capital to support a unitranche of this size. Other investment firms agree that the large amount of uninvested capital in direct lending funds allows transaction sizes to continue to increase.
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