An adviser behind high-profile deals in private credit expects transactions involving direct lenders and distressed investment managers to accelerate as a result of the COVID-19 pandemic.
Driving the trend is interest by large platforms to add private credit and distressed strategies in response to investor demand, said Ted Gooden, the head of Berkshire Global Advisors LP's private markets advisory practice.
At the same time, institutional investors are seeking to reduce the number of asset managers they work with. This will likely drive deal-making in the next year, according to Gooden.
“You're going to see fewer and larger managers at the top end. You're going to see some continued culling at the smaller end for performance and a lack of ability to scale. In the middle market and lower middle market, you're going to see some players start to specialize by sector,” Gooden said. “There's a lot of strategic players who want to enter the (direct lending) market.”
As many as 30% of CLO managers may be in the market to form strategic partnerships as CLOs seek to scale to combat lower margins, Gooden said. For a CLO, $10 billion of assets under management is a new threshold signaling a solid commitment to the business — double what it used to be, according to Gooden.
Another trend driving M&A activity in private credit will likely be private equity firms adding lending capabilities through acquisitions. “It's a natural extension of their business,” Gooden said.
Among the deals Gooden has worked on are the 2018 minority investment in Clearlake Capital by Dyal Capital, Goldman Sachs and Landmark, as well as New York Life Investments' acquisition of a majority stake in Credit Value Partners in 2017.
Gooden believes that direct lenders with loan portfolios that have some performance issues, in the form of defaults and covenant breaches, will not necessarily spell the end for a long-standing, reputable credit business due to the pandemic's unpredictable nature. Key to a private credit business is a firm's origination and underwriting capabilities, which determine fundraising volumes, Gooden said.
“If you've got a good business that's been performing for a long time, and you can explain your positions, I think you'll be in a reasonable position. We need good quality businesses of scale that can originate loans in a thoughtful way.”
“No one has seen a global shutdown like this,” Gooden said.