Unlikely allies: private and public credit
Private and public credit providers will need to co-operate if they want to support an M&A revival
There have been some rumblings this week about financing leveraged buyouts through a mixture of syndicated debt and privately placed direct lending facilities.
As private credit has matured as an asset class and begun to disintermediate banks on ever larger deals, much of the narrative has been about competition between the two sources of capital.
However, as M&A volumes dwindle, financiers on both sides will find it is better to co-operate in order to take advantage of the maximum number of opportunities possible.
Participants in both camps have already shown they can work together under duress, when banks had to slice up deals hung as a result of the Russian invasion of Ukraine, where some junior debt was sold to direct lenders.
Having had more than a year to grow familiar with the idea, these new hybrid deals would be structured to accommodate both varieties of investor from the start.
For the banks, managing the senior debt it would allow them to lay off risk and have more certainty of a successful syndication. Meanwhile, the direct lenders could do more deals with smaller ticket sizes, achieving better diversification when the fundraising markets are difficult.
Being able to combine both sources in a single LBO will give sponsors more certainty that they are able to raise the financing they need and therefore will be more likely to engage in the sort of M&A that the whole market is craving.
It’s time for the dual track financing process to become a holy trinity of funding: public, private or hybrid.