Decrease in Business
Buyout firms with direct lending businesses, such as Blue Owl Capital Inc, Blackstone Inc, and Apollo Global Management Inc, disbursed a total of $151.3 billion in 2022 for middle-market deals, a decrease of 23% from the previous year.
Reasons for Decrease
Seven private credit executives attributed the drop to fewer companies seeking financing, more expensive financing, and lenders becoming more risk-averse due to concerns about a potential economic slowdown. Limited bank financing for leveraged buyouts is also a factor.
Impact on Leveraged Buyouts
The total value of leveraged buyouts in the US fell 32% YoY to $345.6 billion in 2022, down from $507.6 billion in the previous year.
Rise in Cost of Borrowing
The cost of borrowing from private equity firms has recently soared due to higher interest rates, dampening loan demand. Some borrowers are opting to delay refinancing and repaying their outstanding loans.
Private equity firms have become more risk-averse when it comes to lending as the economic slowdown and sticky price inflation erode the creditworthiness of some borrowers.
Drop in Fundraising
The drop in direct lending business has spilled over into fundraising for vehicles that provide the pools of capital for the loans. US private debt funds raised $216.2 billion in 2022, down 6% from the year before.
Major Deals are Still Happening
Major deals using private equity firms as lenders are still getting done as banks have continued their retrenchment from risky debt.