Capitalizing on opportunities in the evolving private credit landscape

How has private credit as an asset class evolved over the last decade?

First the depth and sophistication from the lender community has materially increased. As a result, the quality and size of issuers have changed. Historically, private credit was focused primarily on the middle market as banks reduced lending to these issuers post credit crisis. Now the growth is concentrated in larger issuers – both sponsor-backed and non-sponsored public companies. These issuers may not have historically utilized private credit but are now recognizing that private credit can create solutions where public markets have limitations.

What are some examples of how these larger issuers are accessing private credit markets?

An issuer may be looking to finance a growth acquisition and prefer a private credit solution for speed, certainty and confidentiality, or simply to avoid a ratings process that can have broader implications on its publicly traded debt. Other examples include a strong performer in an out-of-favor sector seeking to return capital, or to finance a more complex transaction that can be better understood by private credit providers.

What opportunities are you seeing today?

There are several themes that are presenting compelling opportunities. Banks remain limited in their ability to underwrite and retain more complex structures or finance unique businesses. These issuers are recognizing that private credit can be a better fit in these situations than seeking a broadly syndicated transaction. After seeing attractive 1st lien LBO opportunities earlier this year, more recently we have focused on acquisition financing for sponsors and public companies seeking to capitalize on lower valuations. As an example, we just completed a HoldCo transaction for a payment solutions provider to which we were an incumbent lender and backed by a strong sponsor we worked closely with on multiple portfolio companies. The travel-related nature of their business, recent capex spending and complexity of their capital structure required us to create a bespoke solution. Given current market dynamics we secured strong terms and covenants that were less prevalent earlier in the cycle. We also anticipate an increase in stressed issuers that will need forms of liquidity financing or other special situation opportunities.

There is a lot of concentration in software in most private credit portfolios. What is your view on software and ARR loans? Is it an opportunity or risk?

From a sector perspective, technology has been the most aggressive in terms of private credit issuance in the last cycle, which has historically been a good indicator for where the greatest dislocations will materialize. Lending was done at aspirational valuations with loose terms and often unattractive economics. As an example, valuations for typical software LBO deals in 2019-2021 were done at levels such as 13-14x revenue which have since collapsed to 6-7x. As a result, many managers are at full capacity for their exposure to the sector and have limited incremental capital to invest in new deals. Furthermore, public markets, venture capital and regional banks – additional sources of capital for these businesses in the past – are now much more limited or unavailable entirely. We have capitalized on take- private LBOs of best in class software businesses done at low LTVs, securing strong covenants, and double digit unlevered yields with substantial call protection. We think the sector will continue to offer opportunities.

What factors differentiate GoldenTree to issuers and sponsors?

We have over 90 investments professionals that work collaboratively across all strategies. This structure allows us to provide quick feedback, analyze more complex situations, and create more bespoke solutions than many traditional investors and allow us to partner across various stages of the business. We invest across all industries and our activity in both public and private markets make us a comprehensive lender. We also work with a broad set of partners and do not rely on one particular channel to source new opportunities. This includes sponsors, our own portfolio companies, banks, and large issuers that primarily invest in public markets. Also, as growth weakens our ability to provide solutions for fundamentally strong issuers that are in more challenging situations will create unique and attractive opportunities.

Want more insights? Watch Lee Kruter, Partner & Head of Performing Credit GoldenTree Asset Management, in conversation with SuperReturn Correspondent Emma Walden at SuperReturn International 2023: