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Amidst public market volatility and economic uncertainty, private capital investment funds remain open for business, albeit with increased scrutiny and rigorous diligence on every deal. Issuers, lenders and sponsors are facing a reality of elevated interest rates that are heading even higher, consumer spending softness translating to lower earnings, and a significant resetting of expectations on how deals can be financed. At last week’s ACG Los Angeles Business Conference, our team met with over one hundred institutional capital providers and sponsors to get the inside scoop on what is really happening in the middle market.
Here is what we learned:
- Inflation and the Fed’s response are top of mind, as investors shift their focus from “peak inflation” to “sticky inflation”. The Fed Funds Rate sits at 4%, and SOFR is expected to peak at 4.8% in Q2 2023.
- “We’re constantly monitoring our portfolio companies’ ability to pass on price increases, particularly as consumers’ wallets come under immense pressure.” – Portfolio Manager, private credit fund
- “There’s no such thing as a free lunch. The trillions of stimulus are coming to roost and we’re holding on to every word Powell says.” – Business Development Officer, asset-based lender
- Public debt markets remain volatile and new issuance activity is down ~70% versus last year. Meanwhile, private credit markets are open, with funds sitting on significant dry powder and actively seeking new deals – albeit carefully.
- “We’re seeing plenty of sponsor deals come across our desk. We have the capital, but we’re cautious – doing lots of homework around how each business would perform in a recession.” – Managing Director, private credit fund
- “Finding the right lender has become much trickier. We’ve had to double or triple the number of reads before getting the leverage and pricing we want.” – Partner, private equity fund
- Credit spreads are widening, and total leverage is compressing across new debt financings. With all-in interest cost typically exceeding 10%, managing debt service and cash flow is becoming paramount.
- “At first, we thought it was an error when the interest payment came in. We checked the math – it was correct. The base rate jump can come as a shock when looking quarter over quarter.” – Managing Director, private credit fund
- “Once interest rates come down next year, we expect a wave of refinancings. Deals closing now are unlikely to be indicative of the leverage borrowers can get in the future.” – Vice President, private credit fund
Running highly competitive processes to navigate current market conditions to find the perfect source of capital is becoming ever more critical. Intrepid brings a full arsenal of resources to help clients achieve their capital raising goals.