Private Capital Call

150 million US adults will “participate in Halloween-related activities,” according to a survey. 53% will decorate their homes and 18% will “dress up their pet.”  

We tried to imagine getting our cat Serena into a pumpkin costume. Not happening. But we are encouraged Americans are spending for the second-costliest holiday of the year.  

Putting cash to work is also much on the minds of private credit investors. With 60 shopping days left in the year, appetite for yield remains keen.  

Some worry that market conditions will get frothy again. But the data doesn’t support that...

We were sad to hear of Coca-Cola’s decision last week to discontinue Tab by year end.  

Launched in 1963 Tab was a pop culture icon, appearing in Back to the Future and Ghostbusters. But competition from Diet Coke spelled its demise.  

It takes superior management to keep brands vital. Remember Scooter Pies, Quisp, or FudgeTown cookies? Without support even popular snacks will fade away.  

Private credit, similarly, features a number of participants, but not all created equal. Some have long successful track records. Others, as one friend put it, “are operating without a driver’s license.”  

A reporter with one top institutional investor-focused publication asked about our view that 2020 could be the best vintage for private credit in a decade...

The journal Astrobiology has highlighted 24 planets that could possibly sustain life. Criteria for “superhabitability” include stars younger than the Sun and atmospheres with warmth and moisture greater than Earth.

All these planets are over 100 light years away – not ideal for COVID getaways. But for those who don’t mind long trips with the kids, such conditions could mean more longer lifespans and a nicer lifestyle. 

Other extraterrestrial news this week came from our content partners who published findings on third quarter fundraising...

“If you liked private credit before, you’ll really like it now.” 

That’s the way one practioner neatly summed up how investors should be thinking about the asset class in a COVD environment. 

The trends supporting that thesis this year should continue well into 2021. A sizzling economy doesn’t really help credit. No worry there. Unemployment is down, but that’s because people have dropped out of the labor market.

Only half of the 22 million jobs lost since March have returned. 4 million jobs in the restaurant, travel, hospitality and leisure industries are gone for good...

With all the distractions of the moment, it’s hard to remember that US GDP dropped 33% in the second quarter – the sharpest decline in history.

It looks, though, like the third quarter is poised for one of the biggest economic rebounds, with estimates around 30%, depending on the impact of stimulus programs that have (or have not) been enacted.

The 2020 downturn may not even qualify as a recession. But businesses are split between COVID-sensitive sectors – which aren’t expected to recover anytime soon – and many in B2B, that have been recovering for months...

We mentioned last week the #SuperReturn North America Virtual conference, where we heard participants on the pandemic’s impact on private credit terms, structures and portfolio performance.   

But what about new business? A lot depends on managers’ strategies. Institutional investors had expected a downturn for a while.  

Significant capital was raised to take advantage of fall-out from the recession when it came. Declining valuations and operating performance would cause mainline lenders to retreat from financings. Opportunistic funds would then step in....

A #privatecredit practitioner would have found no better place to spend the week than at the #SuperReturn North America Virtual conference. As chair of Day One, and on three lender panels your correspondent had a front row seat listening to GPs and LPs describe how they were dealing with the effects of COVID-19 on portfolios, new deal flow, and fundraising.  

The astonishing thing was how consistent reactions were across multiple strategies. Everyone saw initial deal flow come to a stand-still in March and April. They witnessed borrowers quickly inject liquidity and cut operating costs. And they were surprised when valuations and performance relative to covenants wasn’t as bad as they thought they would be.   

Once portfolios stabilized, direct lenders were more receptive to new transactions.  Pricing, at first, was well above 2019 levels; leverage more in line with 2011 than 2020...

While public markets appear to be headed to more choppiness this fall, private markets are just gearing up. We suspect the same worries bedeviling liquid markets are supporting M&A. As a seller, why not cash in your chips today, rather than risk a reduction in your after-tax proceeds tomorrow?  

Financings are being issued at a faster clip than just a few months ago. And while terms have eased somewhat in favor of issuers compared to the first quarter, they’re still more investor-friendly than last year.  

What factors will determine the direction of terms for the rest of the year? Well, for one thing: supply/demand. Mid caps are creatures of competition. The bigger the pipeline, the more choices investors have, so the more likely issuers will see push-back on terms...

Over the past five months, we’ve examined the impact of COVID-19 on the economy and the markets and interviewed top private equity and investment banking partners on deal making in the U.S.  

What’s largely lost in media reporting is the dramatic turn in #privatecredit.  

This asset class emerged from Great Recession to become one of the fastest growing for fundraising and investing. Various trends, greater bank regulation, vast PE dry powder, soaring valuations – all pushed issuer terms to increasingly competitive levels.  

Credit investors found themselves having to choose either the largest fund managers, who won transactions with the least investor-friendly terms, or opportunistic lenders offering higher yields…with much higher risk...

Investors are asking, what is the “new normal” for businesses? Unfortunately, as a recent Accenture study notes, “normal isn’t available to us anymore.”  

In the absence of normality, sponsors and lenders are adapting.  

“We historically focused on six sectors,” one PE partner told us. “COVID swept two away, leaving four. We’re still getting books on the others, but we’re running with traction areas.”  

Investment bankers have seen industries up-ended. Recession-resistant businesses – like gyms – have been slammed. Others like print catalogs have flourished as consumers’ attention shifted to things closer to home....