(Bloomberg) — Buyout firms struggling to offload companies they’ve held for several years and return cash to investors are finding allies in the $1.7 trillion private credit market.
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Direct lenders including Blackstone Inc., Goldman Sachs Group Inc.’s asset management division and Neuberger Berman Group have stepped up to provide fresh cash to those buyout shops by making preferred equity investments in some of the companies they own.
The strategy allows the private equity firms to send some money back to investors at a time when the industry has returned the lowest amount of cash since the financial crisis. Asset sales and initial public offerings — the two main avenues for monetizing buyout bets — have been slowed by higher interest rates and valuation disagreements.
Many of the new deals have taken the form of preferred equity, a hybrid of debt and equity, that give direct lenders a spot in the repayment chain senior to the private equity firms themselves but junior to existing creditors. And they’re structured as payment-in-kind, which allow interest payments to be deferred.
For the private credit firms, the returns on their investment can reach 13% to 15%, while the buyout sponsors seek to keep investors satisfied enough to participate in future funding rounds. Relying on preferred equity also allows sponsors to avoid setting a valuation for the company receiving the investment.
“Sponsors, especially middle-market private equity shops, are having a harder time raising funds as many of their limited partners are looking for some money back from their investment before they re-up into the next fund,” said David Lyon, head of NB Capital Solutions at Neuberger Berman. “Many sponsors have been unwilling to part with their best assets at, in their minds, suboptimal valuations — making them open to hybrid forms of capital.”
Preferred Deals
Over the past few months, sizable preferred equity-fueled dividends have started pouring out of older portfolio companies, sometimes after the sponsor considered but didn’t complete a sale of the business. The private equity owner of National Football League helmet maker Riddell Inc., for example, paused its efforts to sell the business and is instead seeking a preferred dividend deal from direct lenders.
Private equity firm American Securities has tapped Goldman’s asset management unit for a $600 million preferred equity investment that will fund a dividend, after completing a similar deal with Koch Equity Development earlier this year. Waud Capital Partners’ Health & Safety Institute received a $300 million preferred equity investment from NB Capital Solutions to pay a dividend.
“Part of why there has been more preferred investments used for dividends is the lack of other exit options for sellers,” said Peter Sluka, partner and global vice chair of Latham & Watkins’ hybrid capital practice. “This gives preferred investors more power to negotiate for downside protections and board seats, far better than what you are seeing in broadly syndicated and even private unitranche deals.”
The added investment safeguards are essential to attract private credit, given that the capital is going right back out the door in the form of a dividend.
“As a new preferred investor in a dividend deal, you are helping the existing sponsor return money to their investors faster and so it’s an easy argument that you should get a priority on the next equity dollars out,” Sluka added. He declined to comment on individual transactions.
With fundraising for private credit funds poised to reach new records, market participants say more preferred equity deals are likely.
“There are a number of private equity owned portfolio companies that are doing very well,” said Beat Cabiallavetta, global head of hybrid capital at Goldman Sachs Asset Management. “With fewer of those businesses going public or being sold, sponsors will need more options to monetize their investments. In the last quarter we’ve seen the desire to return cash to limited partners really pick up.”
Deals
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Blackstone secured a $325 million debt package led by Golub Capital for its buyout of pet-care company Rover Group. The loan pays interest of about 475 basis points over the Secured Overnight Financing Rate
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KKR & Co Inc. is leading a $500 million financing package for HarbourView Equity Partners, a $1.6 billion money manager known for acquiring music rights of famous artists such as Brad Paisley and Luis Fonsi
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EQT AB agreed to sell its stake in Ottobock SE back to the German prosthetics company’s controlling shareholders. Private credit funds are among those providing the €1.1 billion financing
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Buyout firm H.I.G. Capital is seeking $655 million of private debt financing to help fund its potential purchase of mechanical and industrial cleaning company USA DeBusk
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Blackstone is among a group of private lenders set to provide roughly $1 billion to support Thoma Bravo’s acquisition of enterprise software company Everbridge Inc.
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Citigroup Inc. has held discussions with private credit firms about providing fresh capital to Peloton Interactive Inc. to potentially refinance the company’s debt
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Silver Point Finance and Fortress Credit Corp are joint arrangers on a $375 million loan facility to finance Sweet Oak’s acquisition of Whole Earth Brands Inc.
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Owners of Japfa Ltd., the second-largest poultry maker in Indonesia, are considering taking the Singapore-listed company private and have started talks for a loan that would back any such move
Fundraising
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Growing enthusiasm for private credit among wealthy retail investors could create problems in the $1.7 trillion market without some restrictions on how quickly their money can move in and out, according to Crescent Capital Group’s Chris Wright
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Abu Dhabi’s $892 billion sovereign wealth fund is upping its commitment to a real estate private credit fund, the latest sign that deep-pocketed Middle Eastern investors are looking to play a pivotal role in the asset class
Job Moves
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Goldman Sachs veteran Lee Becker, who was co-head of hybrid capital Americas, has left after more than 17 years
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Roger Zhang, a managing director at Blackstone who was responsible for originating and executing credit investments in Asia, is leaving the firm
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Corinthia Global Management, a platform backed by Nomura Holdings Inc., is hiring a private credit team of more than 20 people from Barings in one of the largest so-called team lifts at an alternative asset manager in recent years
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BlackRock Inc. has appointed Maheshwar Nataraj to lead its private credit business in the fast-growing India market
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