Dealmakers optimistic private credit markets will fully rebound, says new survey
Initially sideswiped by Covid-19 in early 2020, private credit markets began to bounce back by year’s end, leaving dealmakers optimistic that private credit might fully rebound in 2021.
According to a new survey of 112 private credit industry professionals conducted in February, 91 per cent of investors and 80 per cent of lenders surveyed expect deal flow to increase this year and are optimistic about several deal categories and sectors.
For the 2021 Private Credit Survey Report, Katten surveyed an almost-equal weighting of lenders and private equity investors. Those surveyed represent a variety of sectors (including financial services, information technology, consumer staples, communications, industrials and health care) about their outlook on deal flow, readiness to address the London Inter-Bank Offered Rate (LIBOR) phaseout and other issues critical to the private credit industry.
While the appetite for private credit deals in the second half of 2020 led to greater flexibility in deal terms and loan documents, questions remain as to whether that spirit of cooperation will continue. For example, 55 per cent of lenders say there will be pressure from their side of the bargaining table to pull back on “sponsor-friendly” deal terms in 2021. Meanwhile, 50 per cent of private equity investors, who sponsor those deals, say their teams will be even more aggressive in negotiating terms.
LIBOR’s phaseout is a big disruption on the horizon, with a majority of respondents admitting they are not very prepared. The recent extension of the deadline to 2023 has given organisations more time, but respondents will not be able to stall forever.
“As it relates to LIBOR’s phaseout, we can expect the biggest banks and the largest institutions to move on this the fastest,” says Michael A Jacobson, partner and chair of Katten’s Private Credit Department. “But there are some real fears out there for moving first. You certainly wouldn’t want to hardwire something into loan documentation that turns out to be anything [other] than the market approach.”
According to the report, when it comes to deal flow, 19 per cent of private equity investors and 21 per cent of their lenders expect deal flow will increase significantly (by more than 30 per cent).
Nearly two-thirds of private equity investors (65 per cent) and a plurality of their lenders (41 per cent) said loan documents in early 2021 are more flexible than they were before the pandemic — and just 18 per cent of the combined group said the documents were less flexible.
But that might be changing. While most lenders expect their side of the table to put more pressure on negotiations to lessen sponsor-friendly deal terms, just 37 per cent of those investors expect that change. Similarly, 50 per cent of private equity investors expect to be more aggressive in negotiating terms, an opinion held by just 29 per cent of their lenders.
Private equity investors and their lenders were somewhat aligned when it comes to potential growth sectors, with a focus on financial services and information technology. But those lenders were also excited about communications services and health care —with twice as much bullishness on the latter sector compared with private equity investors.
At the time of the survey, fewer than half of survey respondents (40 per cent) said they were very prepared to address the LIBOR phaseout.