Direct lending funds may be flush with cash, but financing for deal-making is scarce. Loans to finance middle-market leveraged buyouts have plummeted nearly 80 percent from the previous quarter, according to Randy Schwimmer, head of senior lending origination and capital markets for Churchill Asset Management, which lends to private-equity owned middle-market companies.
In the first quarter, middle market LBO issuance was over $13 billion, said Schwimmer, who cited Refinitiv data. A quarter later, that had fallen to about $3 billion.
It’s an inevitable consequence of the Covid-19 shutdown, but Schwimmer explained that it’s been worsened by the pick-up of cases in some states and the stabilization in others. A second round of lockdowns has been instituted in some states because of the rise in coronavirus cases. In addition, travel has been further restricted as some states require quarantines when people return from visits to hard-hit locales. Zoom may cross state lines, but deals still happen between people, who want to see each other.
According to his newest research on M&A, Schwimmer said the ratcheting back up of Covid-19 cases in certain parts of the country has led to new pessimism and uncertainty about companies’ future prospects. “It’s a real risk given the reversed course of new cases across the U.S.,” one banker told Schwimmer.
Given the uncertainty, companies may want to keep their financials close to the vest.
“In the current climate you don’t want to run a big process,” the banker added. “Having dozens of lenders witness softer monthly numbers is not a path to success.”
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The industry is smelling opportunity and getting creative about the problem. Middle-Market lender PennantPark recently formed a joint venture with the private credit investment business of Pantheon to create a senior loan fund.
Still, the markets are opening up for buyers that have an in-depth knowledge of certain sectors and businesses. Few players can find the absolute bottom of a market and uncertainty has scared off many competitors.
Schwimmer said one advisor told him that private equity sponsors have moved from risk-off in March and April to the opposite now. “Despite the persistent economic uncertainty, there’s plenty of liquidity for the right businesses,” the advisor said. “Financing is firming up. There’s willingness to underwrite. Non-COVID-impacted businesses are still valued at a premium. And lenders are realizing if they don’t step up now, it’s going to be a disappointing year.”