Five key trends in US private debt

The sector has emerged from last year’s covid-related uncertainty stronger than ever with fundraising on the up and ESG increasingly important.

The market is ‘white hot’

More than 12 months on from the pandemic-induced slump in sentiment, the US private debt market is in rude health – “white hot and hotter than it was pre-covid”, according to Bill Brady, a partner at Paul Hastings, who heads the law firm’s private credit business in New York.

“Many private debt funds stepped up for borrowers through the pandemic, either providing new liquidity or being supportive in finding other solutions as sponsors weathered the storm,” he says. “That has strengthened relationships and, with competition so high, put a premium on digging deep on underwriting, because the margin of error is smaller than ever.”

Relationships are ‘critical’

The importance of relationships is emphasised by Chicago-based private debt manager Twin Brook Capital Partners, where the key takeaway from a tumultuous 2020 was how experience counts in tough times. “From a portfolio management perspective, the open lines of communication that we have with our sponsors and borrowers are always valuable, but they were particularly critical in the face of the pandemic,” says Twin Brook’s Tony Maggiore. “Sponsors were essential partners last year, supporting management teams with operational knowhow and, when needed, often stepping up to invest additional capital.”

Fundraising is roaring ahead

The sense of a strong recovery is reflected in the fundraising data. More than $40 billion was raised for North America-focused private debt funds in the first six months of the year, according to PDI data, well up on the $27 billion raised in the first half of 2020 and exceeding even 2019 levels.

More impressively still, the US market is proving a magnet for global investors:  At the start of July 2021, 42 percent of all the private debt funds in the market globally had a sole focus on North America, with LPs around the world opting for US funds and American
investors opting to stay close to home.

“Investors throughout the world have learned over these five-plus years that middle market private debt offers a very attractive yield premium, it’s a very attractive risk-reward trade. So there’s been huge capital attracted to the space,” says Timothy Lyne, chief operating officer of Antares Capital.

Large-cap transactions are on the up

One indication of the strength of private debt in the US is the number of marquee transactions for direct lenders, says Alexis Maged, head of credit at Owl Rock. In April, Owl Rock, a division of Blue Owl Capital, led the US’s largest-ever unitranche loan, a $2.3 billion financing in support of Thoma Bravo’s acquisition of Calypso Technology. “The market is now seeing larger unitranche deals than we have in the past, due to the availability of capital from direct lenders and willingness of large sponsors to transact,” says Maged.

ESG matters more than ever

Private debt in the US has lagged Europe in tackling ESG issues, but industry observers sense a change of heart. In the last 18 months, many US private debt funds have come from a pretty “unadvanced” position to moving responsible investing up the agenda, with climate change, in particular, getting more air-time, says Keith Miller, global head of private debt at Sanne.

The biggest challenge, he says, is data: “Smaller investment managers are probably lending to smaller corporates where it is likely that there will be less sophisticated reporting capabilities. The challenge is to raise awareness with the borrower on the data that they need to gather and why it is important,” says Miller.