State of the lending market
Leveraged loan pricing is trending higher with tighter structures, so deals are getting done but often with less leverage. In the syndicated market, new leveraged loan issuance is at its lowest since 2020, but the direct lending market has remained robust, filling some of the gaps. Distressed borrowers, however, are having a harder time.
A proliferation in the direct lending space
The growth in direct lenders has led to more competition for PE's deals, meaning PE firms get more partnerships and certainty of close from these lenders. Financing structures have adapted to facilitate larger deals with longer commitment periods as direct lenders benefit from having capital locked up in long-term commitments, where the syndicated loan market struggled.
Deals proceed in spite of market challenges
Deals are still getting done because the financing has to be in place to get a deal signed, even if the underwriting is more complex. In some cases, PE may be missing out on some deals because of lower bids due to less available leverage.
Dealing with market volatility
Some sponsors are busy dealing with portfolio companies by the pandemic, supply chain issues and inflation. Others have slowed deal activity due to a valuation gap - seller expectations remain high while buyers are waiting for an adjustment, so you see a drop in deal activity rather than a decrease in valuations. There's still a lot of dry powder out there that will be invested once some of the current volatility can be priced in.
Hot sectors and geographies for PE sponsors
While tech has taken a beating, industrials look good in spite of supply chain issues. Europe is facing some regulatory and geopolitical challenges, particularly in the industrial sector, but the flip side is that this creates buying opportunities for those taking a longer-term view. Inbound US M&A has also been a bit of a bright spot. In spite of current challenges, deals are expected to pick up again in 2023.
Download the full PEI Keynote Interview article with Michael Fieweger here.