Private equity firms that have for years capitalized on the regulatory woes of banks by becoming lenders to risky leveraged buyouts are doing less business just as higher interest rates have made that practice more lucrative.
Limited bank financing for leveraged buyouts is dissuading many potential borrowers from pursuing deals in the first place and, as a result, fewer of them are knocking on the door of private equity firms as lenders, the executives added.
Also weighing on deal volumes is the cost of borrowing from private equity firms. Such a loan has always been more expensive than a traditional bank loan, yet dealmakers still opted for it when banks faced regulatory constraints in saddling a company with a lot of debt. Milwood Hobbs, head of North American private credit sourcing at Oaktree Capital, said some borrowers are opting to delay refinancing and repaying their outstanding loans because of the higher costs of a new financing. This has restricted the ability of some direct lenders to replenish their capital so they can finance new deals, Hobbs added. "It's been taking more lenders and more time to club up a deal," he said.
"The slowdown [in direct lending] is due to uncertainty about the economic outlook and interest rates, the continued disparity on valuation expectations and some seasonal factors, rather than a lack of debt capital available,” said Kipp deVeer, head of credit at Ares Management CorpThe drop in direct lending business has spilled over into fundraising for vehicles that provide the pools of capital for the loans. U.S. private debt funds raised $216.
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