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Q&A: Vista Credit’s David Flannery on private debt vs. syndicated loans, tech outlook

David Flannery remarks on the balance between private debt versus the syndicated loan market, the outlook for the tech sector, and expectations for private credit over the remainder of 2022.

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David Flannery leads Vista Credit Partners, which is Vista’s credit-investing strategy offering debt and structured equity financing to enterprise software, data and tech businesses. LCD recently asked him about the balance between private debt vs. the syndicated loan market, the outlook for the tech sector, private credit market conditions, and expectations for transaction volume for the remainder of 2022.

LCD: What degree of spread tightening is needed for the syndicated loan market to attract an H2 2022 transaction currently under consideration in the private debt market? Or is it not a question of spread tightening, but rather the structures that are available in private credit that make them more appealing than a syndicated transaction?

DF: This is less about absolute spread tightening and more about the persistence of volatility. As long as equities remain choppy, we believe the private debt market will continue to be more robust than the syndicated loan market. Simply put, borrowers want a higher degree of certainty, lower risk of execution, as well as more efficient processes when looking for financing. This is exactly what is attracting companies to the private debt market, especially today.

Are you expecting an economic slowdown to affect tech companies differently than other industries? How might it play out with this group of borrower companies, particularly in light of the recent trend toward recurring revenue loans?

This is an interesting time in the market because we are seeing the differentiation between enterprise software and consumer-facing internet businesses.

Enterprise software has and always will be mission-critical to operating a business, regardless of market conditions. When businesses are run well, they will have high customer retention rates and visible recurring revenue components. On top of that, there are industry tailwinds that we expect will continue to buoy enterprise software performance in a push towards digitization.

Even so, the question remains whether growth rates might slow in enterprise software. Businesses that are considering putting in new software might take a bit more time, and that might cause growth to slow, but just to a point. As a lender, although we can tolerate some slowdown in growth, we care more about whether revenues, and therefore cash flows, are durable.

How would you characterize the current balance in credit markets between borrower companies and lenders?

We think the lending world is going to see some dispersion in enterprise software. There are some tourists in this space, but not all technology companies are created equal. Identifying truly mission critical enterprise software companies is key, and this factor makes them more resilient during these volatile market conditions.

In terms of balance, the private credit market is lender friendly given the volatility and uncertainty in the equity markets, particularly what we’re doing in lending to non-private equity owned businesses. Today, growth companies and their founders that want to continue to invest in their business are increasingly looking for alternative capital solutions.

This dynamic is driving demand for our less dilutive, flexible capital solutions, which we provide through our FounderDirect offering. (Note: FounderDirect, part of Vista Credit, specializes in founder-run enterprise software companies.)

Many market participants say activity has been slowing since the start of 2022. What are your expectations for transactions for the remainder of the year?

Traditional sponsor-focused private credit managers have certainly seen some slowdown as M&A volumes have declined. However, in this environment, given our unique FounderDirect capabilities, we have seen the level of calls to us from non-private equity owned enterprise software companies increase. With the IPO market all but closed, a choppy growth equity market, and uncertain valuations, these dynamics are driving demand for our less dilutive FounderDirect capital solutions.

This comes back to the basic fundamentals of the business. Enterprise software involves a long sales process before a company buys or licenses a product, but once it is up and running, customers rarely leave. Even though we are in an uncertain economic environment, the “stickiness” or mission-critical nature of enterprise software is why there will continue to be a market for lending to these deals.

What innovations have you experienced in lending markets that have been particularly useful for technology borrowers?

We leverage Vista’s deep domain knowledge, operational expertise and extensive ecosystem, with all its intellectual property, to create a unique solution for growing, performing, non-PE controlled, founder-run companies that are seeking funding to continue executing on growth initiatives. This is a critical segment for us in what we call FounderDirect, a bespoke, tailored offering that helps us drive value beyond invested capital.

Typically, we are the sole lender in a FounderDirect investment, so the relationship between management and Vista Credit Partners (VCP) is considerably closer than in other credit or non-control investments with more active dialogue. We are able to deeply understand a company’s strategy and leverage the operational expertise, financial savvy and strategic thinking that comes with the Vista ecosystem to help a company succeed.

Given these tight-knit relationships, we believe we are well-positioned to recognize and respond to early warning signals of declining performance and call on resources across VCP and the broader Vista platform to collaborate with the borrower to potentially avoid negative outcomes.

Featured image by fuyu liu/Shutterstock

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    Written by Abby Latour
    Abby currently writes about middle-market loans and private credit for LCD. She started at LCD in 2004, writing about high-yield bonds, later turning her attention to distressed debt during the credit crisis. From 2009 to 2013, she wrote about Asia-Pacific credit markets for LCD, while based in Hong Kong. Prior to S&P Global, she was with Reuters, first as a correspondent in the Nordic region and then as a copy editor based in London.
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