News & Analysis

driven by the PitchBook Platform
gettyimages-1151163187.jpg
Club deals

Private credit lenders shy away from club deals

Increased risk and economic uncertainty are making it harder to get multiple lenders on the same page, hamstringing some lenders’ willingness to lead a club deal.

Private credit club deals—transactions in which several direct lenders join together to provide a loan to a single borrower—grew in popularity over the last few years.

The prevalence of club deals was a byproduct of direct lenders seeking to seize a greater share of the upper-mid-to-large-cap markets and private equity sponsors’ tendency to get more private credit firms in their deals.

In today’s market though, increased risks and economic uncertainty make it harder to get multiple private credit firms on the same page, hamstringing their willingness to lead a club deal, said Steven Ruby, the co-head of originated debt at Audax Private Debt.

In a less certain economic environment, it is difficult to appropriately price the transaction and predict whether other creditors will accept the price and terms, Ruby said.

Ruby added that due to this aversion to risk, he has seen the number of lenders willing to lead the syndication of a club deal narrow, as they don’t want to commit to a loan larger than they can hold by themselves.

In Q3 2023, only 6% of LBOs financed in the private credit market were club deals that involved three or more lenders, marking the lowest share since Q1 2022, according to data from PitchBook LCD. In comparison, single-lender deals accounted for 74% of LBOs financed by private credit firms in the same quarter.

 

Private equity firms prefer to engage multiple lenders to fund a new loan, as a lender group can ensure the capacity of incremental debt that may be used to fund prospective add-ons or other growth opportunities. In addition, having several lenders on the deal enables sponsors to navigate negotiations when an amendment needs to be made, such as extending the maturity, restructuring covenants or seeking workout agreements if the borrower underperforms.

And oftentimes, PE firms like to give their preferred direct lenders a chance to participate in deals, even when their participation is not essential to funding a transaction. Rather, the opportunity is offered by the sponsors to help maintain a strong relationship with these private credit managers.

In some large unitranche transactions there are more lenders than there need to be because a sponsor wants to present creditors with the opportunity to be in their deals, agreed Kristopher Ring, a partner in Goodwin‘s private equity group.

But direct lenders, especially those long-established market players, are hoping to involve fewer participants in their deals.

While these creditors still like to team up to finance any loan of more than $1 billion, most of them prefer to be the sole financing provider of smaller deals—namely, loans for companies with less than $50 million in EBITDA, said Chris Lund, the co-portfolio manager at Monroe Capital overseeing its direct lending strategy.

Being the sole capital provider gives lenders greater control when negotiating terms and spreads of the new loan.

And when the transaction is closed, lenders riding solo in the deal also have a better ability to dictate the outcome of any amendments. In contrast, in a club deal, the lender group must take into consideration the opinions of various lenders, which tends to drive conversations in different directions and prolong the process.

With more new entrants flowing into the private credit market, many are willing to make concessions to be participants in club deals just to get their foot in the door, Lund said. These lenders will not directly negotiate terms with the borrower but will accept what has been discussed, making them “term takers.”

As private credit hits this next stage of maturation as an asset class, there is going to be more of a meaningful distinction between these two types of firms: the term makers who can call the shots on terms and prices and the term takers who follow, Lund said.

Featured image by Twomeows/Getty Images

Join the more than 1.5 million industry professionals who get our daily newsletter!