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The private debt markets were once regarded as the dinosaur of the financing world: bank driven, completely immune from world events, and one of the only industries still using fax machines well into the 21st century. But things have changed. As banks have retreated from large parts of the corporate lending space, private markets have proven to be an increasingly attractive and mature funding source for sponsors, especially in times of volatility.  

While there is little transparent data on the size of the private debt sector, an annualised estimate from October 2021 from data provider Preqin suggests that that global private debt assets under management were around $1.21 trillion at the year end, with this figure expected to grow to $2.69 trillion by 2026[1]. In the US, private lenders have provided unitranche facilities sized up to $2.6 billion[2] and in Europe the largest direct lending deals have topped €1.75 billion[3] according to data provider LCD, with private capital providers swooping in to provide the entire term financing for large acquisitions via a single transaction.  

A flexible friend 

Not every transaction has to be done in one go and via the private markets alone, however. Private investors can play a key role in hybrid funding that stretches across all levels of the capital structure, including subordinated debt, senior debt, PIK, and mezzanine, and across all currencies.  

Even if issuers only use private debt markets for one tranche of their funding (whether that be senior or subordinated), they have the security of knowing that part of their financing needs are locked down - without even venturing into the syndicated loan or high-yield bond markets. Increasingly, the privately placed portions of capital can be done at competitive pricing levels and with punchier leverage multiples, although bilateral loans do mean both issuer and lender are tied into facilities with no aftermarket available. 

Borrowers now think about financing from a solutions perspective, rather than focusing on specific products. They tap into the most attractive pools of debt to suit their operating and expansion capital needs at any given point, and private debt provides another option to add into the mix - albeit potentially at a price premium and with liquidity constraints - especially where jumbo financing packages stretch the limits of public markets’ capacity.  

As volatility closed many capital markets in the wake of Russia’s invasion of Ukraine, private capital proved to be a flexible source of financing during this period, including for several deals left hanging due to excessive volatility. For example, direct lenders stepped in to take over huge portions of the financing backing Clayton, Dubilier & Rice’s acquisition of UK supermarket chain Morrisons. Secured bonds of €1.1 billion and €545 million respectively were privately placed with investors rather than sold down through public markets, according to reporting from Bloomberg[4], while the Canada Pension Plan Investment Board snapped up the £1.2 billion junior tranche.  

Of the entire £6.4 billion financing package, only £2.2 billion-equivalent of euro- and sterling-denominated term loans remain to be sold down into the syndicated markets, according to the Bloomberg reports.  

Reaching maturity 

Private debt providers have naturally developed as their market has grown. Deploying capital no longer rests exclusively on bottom-up analysis, but also incorporates multifaceted, in-depth breakdowns of macroeconomic issues, supply chain risks, ESG profiles, and market data analysis. And while relationships remain key to private investors, these have moved off the golf course into more formalised trading arrangements. Today’s private capital provider needs to be nimbler and more knowledgeable than ever before.  

Not least because private debt carries its own set of financial risks and non-financial challenges. For example, it can be hard to access the substantive ESG data from some borrowers that we need as investors to contribute to global sustainability goals and to comply with EU taxonomy regulation. In some corners of the private debt sector, an education process around ESG is still underway to raise data reporting standards in a market unused to public market levels of disclosure.  

Addressing these issues now is important as private debt markets are expected to grow long-term despite the weakening economic backdrop. This is because banks, limited by regulatory requirements, are continuing to reduce their footprint in the leveraged loan markets. The European market can look to the US as a model for this growth where funds already drive more debt financing activity. Despite the economic challenges ahead, therefore, we expect deal sizes to grow and more players to enter this maturing market. 

[1] 2022 Preqin Global Private Debt Report
[2] obtains $2.6B covenant-lite unitranche loan, setting new record, Oct 2021
[3] FNZ lines up £1.5B unitranche with club of lenders, Nov 2021
[4] Banks Face Losses as They Finalize Latest Sale of Morrison Debt, April 2022 

Camille McLeod-Salmon

Camille McLeod-Salmon

Portfolio Manager

Nina Flitman

Nina Flitman

Senior Writer