Having moderated three private credit panels in the past ten days, a recurring theme we’ve heard is the record level of deal volume. What’s driving this unprecedented activity?  

In its recently published 3Q survey, William Blair reported $155 billion of institutional loans, nearly the highest number they’ve recorded. $92 billion was dedicated to M&A transactions.  

Covid tailwinds are boosting companies to historic highs on revenues and Ebitda, encouraging owners to cash out at relative valuation peaks.

We reported (in person!) this week from the SuperReturn Private Credit conference in Chicago, an event that always attracts top-shelf credit investors and managers.   

In a keynote interview with economist and former Federal Reserve governor, Randall Kroszner, we explored the contrast between two US economies: Covid-challenged, like restaurants, that are still in a recession, and Covid-assisted, like technology, that’s on a hiring tear. How can one monetary policy cover both?  

Dr. Kroszner agreed this is a fundamental challenge. He also cited a study in which differing state incentives in the Sioux City region resulted in the same employment outcomes...

News reached us recently of a young walrus that had wandered south from his Arctic range in search of ice floes. Landing in Ireland, Wally began boarding luxury yachts. The property damage turned the whiskered wayfarer from “visiting celebrity to public enemy number one.”  

It all worked out, though, when a marine biologist enticed the walrus onto a pontoon, which was hauled out of the harbor. Wally was last seen frolicking off the coast of Iceland. “He avoided sinking any boats while he was there,” one rescuer happily reported.   

In the world of low rates and an uncertain economy [Chart of the Week], credit investors are similarly tempted off their usual hunting grounds. As Nuveen’s Brian Nick highlighted recently there is a “lack of clear and consistent signals about the trajectory of the global economy and public policy.”...

Of the many unanticipated consequences of Covid, one catching our eye was the recent NYT headline: “Birds Thrived During Lockdowns.” Seems that while we were stuck at home last spring, our feathered friends were out partying.   

Urban areas, otherwise crowding out some species, saw hummingbirds and bald eagles return at 14 times pre-pandemic levels. “I am shocked at the fact we saw so many changes in bird behavior,” a Canadian conservation biologist reported. Pigeon populations were unchanged.   

Leverage finance has experienced similar post-Covid alterations of behavior. This week the broadly syndicated market set a record for annual issuance - $505 billion, according to S&P LCD. With the bulk of the fourth quarter to go, 2021 will easily surpass 2017’s record $503 billion...

Last fall, the Harvard Business Review examined Covid’s impact on supply chains. The pandemic, they wrote, “exposed vulnerabilities in the production strategies and supply chains of firms just about everywhere,”   

The study also presciently identified “the growing electronics content in modern vehicles” as a potential bottleneck. Today we are witnessing how the shortage of semiconductor chips is hampering auto production.   

Moving production in-house and increasing automation could help with uncertain labor and even social distancing. But consumers are demanding more choices, spawning a blizzard of SKUs. We love our Cheerios, but do we really need 23 varieties? (Including Pumpkin Spice, Limited Edition).

Even in normal times, private equity sponsors pay ruthless attention to cost structures of portfolio companies. Covid has raised to new levels the challenges buyers have managing supply chains. 

“Eighteen months ago, Covid was a top-line issue; now it’s mostly a cost issue,” one partner told us. “We can pass price increases along, but with  90-days notice. That’s too long to wait.”

Another source agreed. “We’ve been playing catch-up all year,” he said. “Revenues are fine, but costs are out of whack. And here we are a year later – we thought this would be fixed by now!”...

Before Covid the persistent view of private credit was too much capital chasing too few deals. Transaction inflation was resulting in tight spreads, high leverage and weak terms. 

When Covid hit this balance shifted dramatically in favor of the investor. Deal supply dried up, lenders retreated, and terms strengthed. But within weeks central bank liquidity ended that run. 

Today the private credit pipeline is at record levels, fueled by a combination of near-zero risk free rates, low relative value for riskier assets, and volatility from more correlated strategies such as public equities...

One of the more fascinating aspects of the past 18 months has been watching the divergent economic narratives between headlines and data.  

The Bureau of Labor Statistics reported a record high 10.9 million job openings in July. The three largest sectors comprising this increase were healthcare, finance, and food services.  

Yet there also less than 9 million people unemployed. How can there be such a shortage of experienced workers when there are more jobs than jobless?

Last spring we were shopping for garage doors. Lumber prices had skyrocketed – almost to the price of gold. So we chose steel. As did everyone else. Wood is now cheaper. And we’re still waiting for our doors.  

The industry publication Supply Chain Management Review reported that 2021 is on a record pace for factory fires – up 150% this year caused by “gaps in regulatory and process execution as well as a shortage of skilled labor in warehouses.”  

They also analyzed data showing supply-specific shortages were up over seven-fold from 2020. These are due to merger-related activities, as new owners drive for operating efficiencies, leaner inventories, and lower costs. All while still attempting to meet evolving customer demand...

“The #unitranche was invented in response to broken capital markets, when banks were backing away. Today it’s thriving when markets are booming.”  

The size of these financings has also grown dramatically. How large could they get? We remember the same questions being asked about broadly syndicated loans in 2007.   

If the largest direct lenders collaborate, a $5 billion unitranche could come by year-end. Particularly with a large software company...