All Ahead Full: Private Credit Outlook 2022 (Fourth of a Series)

Back in 2015 we introduced the concept of the “cargo-pants strategy” [link]. It was our observation that direct lenders saw the opening to compete against banks for leveraged finance deals, but needed virtual balance sheets to hold larger commitments.

Over time these managers raised multiple vehicles – CLOs, separate managed accounts, commingled funds, BDCs, etc. – to create loan storage pockets. They could then allocate commitments of size across vehicles without any holding outsized positions.

As pockets were added, hold sizes grew. Over the past six years direct lenders’ average holds expanded from $25-30 million to $100 million-plus. At the same time, the development of the unitranche [link] has given managers a competitive instrument to take share from loan arranging (not loan holding) banks.

In 2017, per Refinitiv LPC, only 28% of unitranches were above $250 million. Today that share is up to 77%. Migrating into the broadly syndicated market requires not just size, but also large cap terms. The most significant is cov-lite. We vividly remember not long ago hearing a private credit manager scoff at the idea of a cov-lite unitranche: “Who would do that?”