Why taking on the banks is a big deal

Having carved out much of the mid-market, some private debt firms have their eyes on more substantial prizes. But do investors have cause for concern?

With bidders including Apollo Global Management reportedly lining up to buy UK high street retailer Boots for a sum expected to be around £6 billion ($7.5 billion; €7.1 billion), some of the attention has focused on the role of private debt. A few years back, it would have been too much of a stretch for private debt firms to have any involvement in such transactions – but as the asset class has grown in popularity, and fund sizes have become increasingly larger, they are now able to muscle their way into deals of considerable heft.

Given the amount of capital needed for the Boots financing, and the complexity and sophistication of some of that capital, the assumption is that the banks will not be able to deliver the whole package. Private debt has been linked to the ‘riskier’ aspects, which is likely to mean junior capital elements such as preferred equity or payment-in-kind.

Beyond Boots, there are plenty of other deals where private debt can be seen making its mark at the larger end of the market. Currently in the headlines is a reported $4.5 billion unitranche financing being led by Blackstone in support of private equity firm Hellman & Friedman’s purchase of IRI, the market research firm. There have been many other weighty unitranche deals undertaken by private debt firms in recent years, including a $3.4 billion facility for Galway Insurance late last year led by Antares Capital.

In times of volatility, banking capital has a tendency to become less than certain. Sponsors and borrowers needing financing packages to close at some point in future will be wondering whether that bank finance will be there when they need it. By contrast, certainty of execution is a plus point for private debt given that they have large sums of committed capital under management. Private debt firms are also favoured for the flexibility of their financing and absence of market flex, which effectively mean banks can change the agreed terms of a financing to make the syndication process easier.

Some banks are understood to be feeling deeply uncomfortable at the sight of private debt firms treading on their patch. Taking a large share of mid-market corporate lending in the wake of the global financial crisis was one thing – claiming a chunk of the traditional syndication market would be another. But for private debt firms, such an evolution gives them pause for thought as well. Not least: as an investor, am I entirely comfortable backing managers that appear to be transforming into quasi-banks?

Keep an eye out for the June 2022 edition of Private Debt Investor, in which our cover story will explore the implications in depth.

Write to the author at andy.t@peimedia.com