Deals

Private debt firms expect deal boom as competition heats up – report

Investors are bullish about deal activity, but increased competition has fuelled concerns about covenants and EBITDA multiples.

-

More than 40 percent of private debt investment professionals think deal activity will increase in the next 12 months, according to a survey by Proskauer.

Findings from Proskauer’s Trends in Private Credit survey reveal a bullish attitude among private credit firms with only 12 percent saying deal activity will fall in the coming year.

Of the 41 percent that expect activity to increase, 31 percent cited an improving economic outlook, 23 percent thought deal activity will be driven by increased capital availability and 20 percent expect dry powder levels to drive deals.

European firms were the most pessimistic, with 48 percent expecting the market to be less active and 39 percent expecting increased activity. By contrast just 11 percent of US investors expected deal activity to fall.

Positivity may be linked to increased faith in interest rate rises this year. A huge 99 percent of US firms surveyed by Proskauer expect interest rates to increase in the next 12 months. This compared to 78 percent in the UK and 49 percent in the Eurozone currency bloc.

Despite increased interest rates, only 9 percent of US firms expect higher pricing than over the past year, but 54 percent expect lower pricing. Almost half of European firms also expect lower pricing.

This is likely driven by increased competition, which was the top challenge to dealmakers highlighted by respondents. High transaction multiples was the second biggest concern, followed by a lack of quality assets in the market.

Covenant-lite and springing covenants were seen as the biggest risk to lenders, closely followed by allowance of add backs to EBITDA calculations. One survey respondent said: “We continue to believe that giving up control in underperforming investments (covenant-lite structures) represents the greatest risk to lenders over the medium-to-long term.”

Another added: “The allowance of add-backs is not on its own particularly risky or harmful — it has long been standard to include normalising add-backs for one-time or non-cash charges — it is aggressive EBITDA definitions with the ability to include (occasionally uncapped) prospective, pro-forma synergies that pose the problem.”