Real Deals | Yield of Dreams

Sep 2023

Originally posted by Real Deals on August 29, 2023.

Private debt is growing quickly despite rising interest rates. Recent Preqin data indicated that $33.7 billion was raised in Europe in Q2 2023, which is a significant increase compared to the $4.9 billion that was raised in Q1 2023.

Amidst this growth, the structure used to finance transactions is evolving and many are reconsidering how to compose deals.

Aude Doyen, Managing Director in Lincoln’s Capital Advisory Group, commented, “How shareholder loans are priced is an obvious example of this. The vast majority of PE firms would have priced their loan notes at 10-12%; the reality of today’s market is that it should be more expensive than that, relative to the pricing of senior debt. We’ve seen a number of sponsors we’ve worked with in the past price their loan notes at 12%, and now they’re considering 15%. It’s not every financial sponsor, and many are probably still waiting and seeing.”

Private credit funds are also raising more funds with the goal of larger hard caps which would enable them to do bigger deals, not only on a club basis but a bilateral basis. Aude said this trend is because the financing process for a larger deal is often easier as it does not involve much more work than underwriting a smaller deal, but more capital is being deployed so it is more attractive.

The current market has also led general partners to rethink the financing process.

Aude added, “There has been a shift in the way that investors think about their financing processes. In the last 10 years, it’s been seen as easy or non-core by the majority of financial sponsors, but it’s now one of the most important and prevalent topics.”

View additional insights in the original article.