Private equity firms added or expanded their private credit capabilities in a spate of recent deals, highlighting both the potential synergies between the two lines of business and the rising profile of non-bank lenders.
In the same week that growth equity specialist General Atlantic Service Co. LP announced its acquisition of Iron Park Capital Partners LP to build-out its private credit arm, KKR & Co. Inc. launched a new partnership with Mubadala Investment Co. PJSC, aiming to jointly deploy at least $1 billion in private credit to businesses in the Asia Pacific region. Then, Apollo Global Management Inc. announced a tentative agreement to acquire a credit solutions business from Credit Suisse Group AG.
The deals were announced at a time when capital for private equity deals and for private company growth, typically sourced from banks and bond markets, have become more expensive and harder to access.
"The public markets, for all intents and purposes, are not open as a provider of capital to growing private companies," said Michael Arougheti, president and CEO of Ares Management on the asset manager's third-quarter earnings call. "The leverage loan market is largely unavailable. The high-yield market is largely unavailable."
The uncertain macroeconomic outlook makes it difficult for lenders to price the issuance of leveraged loans, the kind often used to fund private equity buyouts. The $10.6 billion of leveraged loans raised for buyouts of U.S. companies in the third quarter was the lowest quarterly total in almost seven years, according to Leveraged Commentary & Data statistics cited in a Private Equity Wire report.
Bringing both private equity and private credit operations under one roof offers potential advantages to both businesses, said RJ Joshua, vice president of research insights at Preqin. An asset manager's private equity fund is a potential driver of deal flow for the private credit business, which in turn is a ready source of financing for portfolio companies held by the private equity fund, he said.
Craig Larson, KKR's head of investor relations, touted the key role the firm's global broker-dealer business, KKR Capital Markets, is playing for KKR portfolio companies at a time of scarce financing.
"Our ability to access and finance the capital markets during periods of distress is actually something that we think of as being a real competitive advantage for us," Larson said on the firm's third-quarter earnings call.
Credit as diversifier
Additionally, the Federal Reserve's four 75-basis-point interest rate hikes this year make it more expensive to finance deals, resulting in a slowdown in transactions.
As deal flow decelerates, a private credit unit can add diversification to a private equity firm's business strategy.
Higher interest rates can boost the performance of private credit, since most private credit is floating rate, but it nonetheless attracts borrowers because it can provide more favorable loan terms than traditional sources.
"In risk-on, private equity makes money. In risk-off, private debt keeps the lights on," Joshua said.