When buyout firm Thoma Bravo LLC was seeking lenders to finance its acquisition of business software company Anaplan Inc, it skipped banks and went directly to private equity lenders including Blackstone Inc and Apollo Global Management Inc. Within eight days, Thoma Bravo secured a $2.6 billion loan based partly on annual recurring revenue. They announced the $10.7 billion buyout. The Anaplan deal was the latest example of what capital market insiders see as the growing clout of private equity firms’ lending arms in financing leveraged buyouts, particularly of technology companies.
Banks and junk bond investors have grown jittery about surging inflation and geopolitical tensions since Russia invaded Ukraine. This has allowed private equity firms to step in to finance deals involving tech companies whose businesses have grown with the rise of remote work and online commerce during the pandemic. Buyout firms, such as Blackstone, Apollo, KKR & Co Inc and Ares Management Inc, have diversified their business in the last few years beyond the acquisition of companies into becoming corporate lenders.
Loans the private equity firms offer are more expensive than bank debt, so they were generally used mostly by small companies that did not generate enough cash flow to win the support of banks. Banks have also grown more conservative about underwriting junk-rated debt in the current market turbulence. Private equity firms do not need to underwrite the debt because they hold on to it.
Rising interest rates make these loans more lucrative for them. They are seeing sponsors dual-tracking debt processes for new deals. They are not only speaking with investment banks, but also with direct lenders, said Sonali Jindal. Comprehensive data on non-bank loans are hard to come by, because many of these deals are not announced. Direct Lending Deals, says there were 25 leveraged buyouts in 2021 financed with so-called unitranche debt of more than $1 billion from non-bank lenders. This is more than six times as many such deals.
Thoma Bravo financed 16 out of its 19 buyouts in 2021 by turning to private equity lenders. Erwin Mock, Thoma Bravo’s head of capital markets, said that the non-bank lenders give it the option to add more debt to the companies it buys and often close on a deal quicker than the banks. Mock said that the private debt market gives them the flexibility to do recurring revenue loan deals, which the syndicated market currently cannot provide that option. Some private equity firms are also providing loans that go beyond leveraged buyouts.
Apollo last month upsized its commitment on the biggest ever loan extended by a private equity firm. A $5.1 billion loan to SoftBank Group Corp, backed by technology assets in the Japanese conglomerate’s Vision Fund 2. Brad Marshall said that they are not constrained by anything other than the risk when they are making these private loans. Some bankers say they are worried they are losing market share in the junk debt market. Others are more sanguine. They are pointing out that the private equity firms are providing loans that banks would not have been allowed to extend in the first place. Also, many of these loans get refinanced with cheaper bank debt once the borrowing companies start building cash flow. Stephan Feldgoise, global co-head of M&A at Goldman Sachs Group Inc, said the direct lending deals are allowing some private equity firms to saddle companies with debt to a level that banks would not have allowed. Feldgoise said that while that may to a degree increase risk, they may view that as a positive.