- Next Gen Private Capital: Financing technologies, the next phase of applications.
In the absence of fully functioning public markets during the Fed’s intense anti-inflation campaign, liquidity was drained, not just from the economy but from bank reserves, trading desks, CLO formation and retail fund flows. Of course, this was in addition to the decades-long effort by regulators to discourage banks from holding leveraged loans on their balance sheets.
The result was the steady disintermediation of buyout financings away from broadly syndicated loan and high-yield bond markets to private credit managers. There issuers had the benefit of quick execution without relying on a syndication process and price certainty with managers holding (not distributing) debt. Simultaneously investors enjoyed the higher premiums, better protections, tighter terms, and consistent returns afforded by less correlated assets.
Lower interest rates will likely create better conditions for liquid loans as the improved equity arbitrage for CLOs supports more vehicle formation. It’s a fairly typical feature of the cycle to then have banks invade the higher end of the middle market, borrowers with Ebitda below $100 million, with higher leverage, unitranche, cov-lite structures, and tighter pricing.