Institutional investors are increasing their share of the leveraged buyout market as increased scrutiny from US regulators prompts banks to take a step back.
Bank lenders continue to be active in the market, investment firm Partners Group said in its bi-annual private investments report. However, bank participation in LBO transactions, as a proportion of the whole loan market, has fallen to the lowest level ever recorded, it added referring to S&P LCD data.
In the first half of 2015, European and US banks represented 38 percent and 14 percent of the primary loan market respectively, due to capital constraints and strong liquidity provided by institutional investors including CLOs and direct lending funds.
Banks are less willing to pursue aggressive financing structures, as a result of the US Securities and Exchange Commission taking a stricter view on ‘bad behaviour’ by banks, Partners said.
In Europe, 19 CLOs, with a total size of €7.6 billion, were issued in the first half of 2015, compared with 16 and €6.9 billion the previous half year, and volume is set to grow further, the firm said.
However, a lack of primary deal flow has caused investors in general to accept more aggressive structures in the first quarter of 2015 than in the second half of 2014.
The large-cap market is more affected by this trend, the firm said, adding that the mid-market was largely protected.
“Relative value remains to be found in mid-cap direct loans, in particular ‘club-style’ executions which offer a return premium,” the report said.
The lending markets remained disciplined over the first half of 2015 however, Partners said, with total leverage at 4.7x and equity cushions above 40 percent for both the US and Europe in H1 2015.