A Year in Review (Second of a Series)

Along with the sense that mid-cap lenders can now more than hold their own against the largest investment banks in terms of deal size has come a predictable question: With all the lending capacity that’s now available in the middle market, isn’t there too much cash chasing too few deals?

A long-time middle market practitioner took on the “overheating” worry with us recently. “Honestly,” he remarked. “When do lenders not complain about too much cash chasing deals? You hear that every year. Yet everyone always seems to find enough good deals to work on and comfortably make their budgets.”

He went on. “Banks are increasingly disintermediated from leveraged lending. That’s a lot of capacity leaving the market. And it’s not over yet. Plus a lot of the funds being raised today are for higher yielding vehicles, such as private BDCs. They need 8% yields at the asset level. That’s not the first-lien cash flow middle market loans that comprise most of sponsored volume.

Another private credit chief agreed. “People confuse ‘stock’ of dollars raised with ‘flow,’ he said in a recent Lead Left interview to be published later this month. “We’ve raised $5 billion of capital for our direct lending business. That’s what the Preqins of the world report when the data is published. But $4 billion of that is capital already deployed. Our flow is the $1 billion private BDC that’s true dry powder. So I believe a fraction of the numbers being advertised are actually soaking up deal supply.”