To understand the dynamics of buyout finance today, you need to appreciate the difference in what drives the public credit markets versus private credit. The biggest change since the GFC has been the shift away from the investment banking model.

For both corporates and private equity-backed deals, borrowers often relied on investment banks to advise on, and propose financing terms for, transactions – the so-called “one-stop shop.” Banks extended underwritten commitments based on expectations of buyer appetite, with buyers being CLOs, retail funds, and insurance companies. Terms held only to the extent the market didn’t move substantially, otherwise underwriters could “flex” them.  

It feels as if some media outlets, rating agencies, and bank research teams are stuck in the early 2000’s. They report as if banks are “lending” and that non-banks operate on the same playing field. That leads to mistaken pattern recognition where dynamics such as default and valuation data in publics arise from a very different context than what actually occurs in privates.