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Private Credit

Public-to-private financings generate opportunities for Europe’s direct lenders

As plain-vanilla LBOs struggle to get into gear, take-private deals offer new opportunities to transact for European sponsors and lenders.

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As plain-vanilla LBOs struggle to get into gear, take-private deals offer new opportunities to transact for European sponsors and lenders alike. For direct lenders the sometimes lengthy processes involved in closing public-to-private (P2P) deals plays to many of their strengths, even if the scrutiny and due diligence they require is far beyond a typical transaction for these firms.
This year is again looking like a busy one for take-privates following a record year for such deals tracked across all LBOs in Europe. In total, 51 such deals were counted last year, up from 41 in 2022, according to PitchBook data. 
“It’s a less competitive area of the market compared to the buyouts of unlisted companies for confidentiality reasons and the 'Rule of 6' [in the UK Takeover Code]. Also, the deal sizes are bigger, and valuations are at attractive levels as share prices have been adjusted for macro uncertainty and rising rates,” said Floris Hovingh, head of EMEA, debt advisory at Perella Weinberg. And there are more take-private processes in the European pipeline, added Hovingh, while noting that direct lenders are confident they will continue to have an edge on such deals.
The step up in P2P deal volume comes as private equity funds take advantage of depressed valuations in public markets, to pick up high quality assets at favourable prices. The difficulty that sponsors have had in agreeing to valuations on sponsor-to-sponsor deals has helped P2Ps take an increasing share of the M&A market for a while now — especially in the UK. These transactions are particularly attractive for PE funds as they can unearth assets untouched by the relentless back-and-forth of LBO activity. Also, private markets can be more attractive for corporates as they appreciate the confidentiality away from the glare of the public space.
“We anticipate an increase in demand for take-privates, building on the momentum observed last year, and expect private debt to play an increasingly prominent role in these deals,” said Amit Bahri, co-head of European direct lending and managing director at Goldman Sachs Asset Management, while noting that direct lenders are the natural solution for private equity to finance such deals. "Direct lenders can provide price certainty and more structural flexibility, especially when additional debt in the form of PIKs is required, which is relevant in the current environment,” he added. 
Need for speed
Daniel Sinclair, partner in the Ares Credit Group, added that direct lenders can bring speed, certainty and deliverability to the execution of take-private deals, noting that sponsors and management tend to avoid the loan syndication process, where the ultimate funding partners are unknown. “Additionally, the market flex terms offered by banks over the last 12 months have added more complexity and uncertainty. We believe all this makes direct lenders the relevant choice for P2Ps,” he added. 
In 2023, P2P transactions represented 41% of European syndicated leveraged loan buyout volume, according to LCD, which is the second-highest such annual percentage on record, and more than the share taken by corporate carve-outs (31%) or secondary buyouts (28%).
Though the interest for P2Ps is undeniably growing, they have always been a feature of the European market. Back in 2008, for example, such deals represented 44% of buyout volume, while five years later in 2013 they took a 37% slice. Meanwhile, the share of the M&A market taken by P2Ps has been increasing in the last 10 years or so — in 2013, P2Ps represented 14% of the deals by count, and by 2023 that share had risen to 23%.
Spectacular financings
This growth in take-private financings in the broadly syndicated market has provided direct lenders with an opportunity to take further market share from underwriting banks. What's more, the stock market also opened the door to some of last year’s most spectacular financing packages for private credit lenders. In June, for example, EQT's bid to buy Dechra Pharmaceuticals was backed by a £1.25 billion underwritten unitranche from lenders including Blackstone, Goldman Sachs, CDPQ, CVC Credit, Delaware Life, KKR Credit, Permira Credit, Park Square, PSP, RLA Private Credit and West Street.
More recently, Swedish firm Byggfakta was acquired by Stirling Square, TA and Macquarie Capital (via the entity Giant BidCo), in a deal supported by credit facilities provided by Goldman Sachs and Permira.
The most high profile P2P last year was for Adevinta, with Permira and Blackstone's agreed bid to buy the Norwegian company backed by a €4.5 billion loan provided by a club of private credit funds led by CPPIB, Blackstone Private Credit and GIC. Other big lenders on the deal include ICG, Sixth Street Partners and Goldman Sachs AM.
There were also P2P deals involving bank loans such as SUSE and Synlab in Germany, and potential take-privates such as Applus in Spain.
Banks push back
While the scale private credit has enjoyed so far in terms of participating in take-private deals has come on the back of a still-reticent syndicated bank sector, the latter has come back strongly in the last few months — albeit not at quite the same depth as was evident prior to Russia's invasion of Ukraine.
“It could be a better fighting ground for banks,” said Alexander Griffith, partner at Proskauer Rose, of the market for such deals, while adding that it's easier for banks to meet cash-confirmation requirements for take-privates compared to direct lenders, especially for the first few times that direct lenders provide such commitments.
Almost 90% of European buyout deals in 2023 were backed by private lenders rather than broadly syndicated loans, according to LCD, though take-privates could remain a viable hunting ground for bank lending.
For big-ticket deals, financing requirements are similarly large, which means in many cases that private credit funds need to club together. In the case of Adevinta, the club reached nearly a dozen institutions. But for a syndicated deal, a couple of banks will typically be enough to underwrite a financing — which limits the number of parties involved and helps maintain deal confidentiality. Given the danger of counter bidders, privacy is paramount for take-privates, and more so than in a plain-vanilla LBO.
Stumbling blocks
Take-private deals also throw up some stumbling blocks and complexities for private lenders. “The whole due-diligence process takes a lot of time. Credit funds often don’t realise these challenges unless they have previously backed a P2P,” said Griffith. “We have definitely seen that last year, for those P2P deals that proceeded to close, some credit funds had a hard time managing the cash-confirm process.” All this demands an extreme level of due diligence, Griffith noted, meaning private credit firms need to submit to a degree of scrutiny they are not familiar with. “They are not used to having people dig into their structures and commercial arrangements, that are usually always kept behind the scenes,” he added.
The UK takeover code dictates the need for cash confirmation — i.e., that sufficient cash is available for the bidder to satisfy in full the acceptance of the offer — which is much easier to deliver for a bank than a private lender, Griffith explains. “We know of other jurisdictions and markets that have a less demanding regime,“ he noted.
A further complexity for private credit funds financing take-privates, as opposed to banks, is that on each deal the financial adviser to the bidder is likely to want to undertake diligence on the fund's sources, explains Paul Mullen, global head of banking at Hogan and Lovells. This can involve a significant exercise where a private credit manager arranges for multiple funds under its management to participate in the debt commitments, and so each fund has to be cash-confirmed, he notes — while to make sure the cash will be available, each fund needs representation. “One option is for the private credit fund manager to have a smaller number of funds who are committed during the certain funds period to lighten the burden of the due diligence required, with a view to bringing in other funds at or immediately after closing,” Mullen added.
However, market participants broadly agree that these P2P complexities are not insurmountable obstacles for private credit funds, and — provided all parties are aware of the diligence requirements and build them into their timetables — there is no reason why debt funds cannot finance these deals, Mullen suggests.
Experience counts
Meanwhile, direct lenders say their strength not only lies in their ability to cut big cheques, but also in playing into the sectors where they have experience. “Transactions we were involved with last year were in sectors where we had substantial expertise, and we thoroughly examined comparable businesses in other geographies,” said GSAM's Bahri, adding that some level of complexity is why P2Ps are more suited for private credit. “It’s not a cookie-cutter transaction; that’s why we believe P2P is where private credit will play an increasingly significant role,” he added.
Taking the example of Adevinta, which was the largest take-private deal last year, this was a dual-track process but ultimately went to a very large pool of direct lenders. The lenders were really competitive on the deal, which finally priced around E+575 bps, according to sources — clearly below the E+650-675 bps level where private credit firms were pricing deals at that time.
However, one factor that could impact private credit’s push towards doing more take-privates is the recovery of the M&A market, which could shift the focus of both private equity and credit firms towards the buyout financing of unlisted companies. “Last year, very few sponsors offered their assets for sale. If this changes, funds may have more deal options than pursuing P2Ps,” Bahri concluded.

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