Loan Note: Boom times for US mid-market; fundraising in strong bounce back

The US mid-market is riding a wave but there are issues for the industrials sector. Plus: a word of caution on the use of leverage in an inflationary environment and how fundraising has bounced back. Here's today's brief for our valued subscribers only.

They said it

“Inflation is everywhere, and it could be around for longer than anyone would like. So, why didn’t the Fed – the central bank of the world’s largest economy – not see what was coming?” 

Nigel Green, chief executive officer of deVere Group, the financial advisory, asset management and fintech firm.

First Look

Booming US mid-market, but problems for industrials
US mid-market firms are going strong, according to the latest US Middle Market Report from fund manager Golub Capital. The report covers 100 mid-market private companies and found that their EBITDA grew 22 percent and revenues 21 percent from October/November 2019 to October/November 2021.

“Boomflation continued in Q4,” said Lawrence Golub, chief executive officer of Golub Capital. “For the third consecutive quarter, median revenue and EBITDA grew by more than 20 percent compared to the same period in 2019, pre-covid.”

However, the report identified difficulties for the industrials sector with many companies unable to meet demand due to rising costs and physical supply chain problems. The missed operating leverage allowed increased labour and material costs to compress margins.

Golub predicts that 2022 will be something of a crossroads, revealing “which private equity-backed companies fixed their 2020 covid-related problems permanently and which just kicked the can down the road and will now face hard times”.

A caution on leverage 
The good times are rolling in private credit, but firms need to be careful about leverage given the environment we’re moving into. That’s the message from Jamie Athanasoulas, managing director of private credit at HarbourVest, the US-based private markets specialist, as part of a series of outlook pieces written by senior professionals at the firm.

Athanasoulas points out that deal volumes reached record highs in 2021, while default rates remained at historically low levels – with the average default rate last year being 2.1 percent, according to the US S&P LSTA, a public market proxy for the private credit market.

He observed three key themes during last year that he expects to continue into 2022 and beyond: the demand for private credit remaining high due to the $1 trillion of dry powder available for buyout-focused funds; a shift to larger deals as private credit encroaches on the syndicated market (upper end has soared from $500 million to as much as $3 billion); and a pronounced shift in focus to the healthcare, business services and technology sectors which are perceived to be less cyclical, with high cashflows and low default rates.

However, Athanasoulas did sound a note of caution: “Many companies and private equity sponsors are looking to maximise leverage. It is important to understand the pressures that these companies may face both in terms of rising inflation, borrowing costs and supply chain pressure.”

Data snapshot

Fundraising makes a comeback. Private debt fundraising activity rebounded strongly in 2021 from the lows seen during the height of the covid-19 pandemic in 2020. The total value of funds raised reached $248.7 billion, according to preliminary figures from the PDI Fundraising Report 2021, the second highest full-year value on record. However, the number of funds closed dropped again to just 230 as the average size of vehicles continues to increase.


Partners’ private debt AUM on the up
Private markets firm Partners Group saw its private debt assets under management grow by a net 11 percent between 2020 and 2021, from $24.8 billion to $27.5 billion. This compared with equivalent growth of 23 percent for private infrastructure, 22 percent for private equity and 5 percent for private real estate over the same period. Private debt AUM has shown a compound annual growth rate of 16 percent between 2018 and 2021.

Across its client base, Partners received $25 billion in new commitments in 2021, meaning its assets under management increased by 17 percent year-on-year to $127 billion. The firm completed $32 billion of investments during the year, more than triple the $10 billion invested in 2020. Partners said last year’s deals represented a catch-up effect as a result of deals being postponed by the initial covid outbreak.

Healthy deal pipeline for Twin Brook
US fund manager Twin Brook Capital Partners, the mid-market direct lending subsidiary of Angelo Gordon, announced it committed $3.5 billion to private equity sponsors in support of healthcare transactions last year, completing 60 healthcare deals across 33 sub-sectors.

The firm served as lead agent on nearly all the healthcare transactions it supported in 2021, which included 28 new platform financings and 32 add-on financings. Twin Brook has deployed over $6.5 billion across 169 mid-market healthcare transactions since inception.

Mount Street completes Greece JV 
Mount Street Group, the London-based third-party loan servicing and credit asset management firm, said it has received regulatory approval from the Bank of Greece for a strategic partnership with Technical Olympic, an Athens Stock Exchange-listed real estate, construction, shipping and investment group.

The joint venture, which is focused on Greece and Cyprus, has onboarded €33 million of real estate-backed non-performing loans in its first month of operation. The partnership is aimed at jointly pursuing investment and co-investment NPL opportunities in the real estate, shipping, infrastructure, renewable energy, hospitality and SME sectors.

LP Watch

Institution: Border to Coast Pensions Partnership
Headquarters: Leeds, UK
AUM: £21.72bn
Allocation to alternatives: 13.8%

Border to Coast Pensions Partnership has approved $613 million in commitments across three private debt vehicles, according to a press release issued by the retirement fund.

The commitments comprise $208 million to Ares Senior Direct Lending Fund II, $130 million to Strategic Value Special Situations Fund V and $275 million to KKR Diversified Core Infrastructure Fund.

The £21.72 billion ($29.7 billion; €26 billion) UK public pension’s recent private debt commitments have focused on senior debt strategies in the US and Europe.

Today’s letter was prepared by Andy Thomson with John BakieRobin Blumenthal and Michael Haley.