Analysis: With capital markets jittery, private equity rushes in to finance tech buyouts

A Wall Street sign is displayed outside the New York Stock Exchange amid the coronavirus disease (COVID-19) pandemic in the Manhattan borough of New York City, New York, USA. , April 16, 2021. REUTERS/Carlo Allegri

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April 4 (Reuters) – When buyout company Thoma Bravo LLC was looking for lenders to finance its acquisition of enterprise software company Anaplan Inc. (PLAN.N) last month, it bypassed the banks and went straight to private equity lenders, including Blackstone Inc. (BX.N) and Apollo Global Management Inc. (APO.N).

Within eight days, Thoma Bravo secured a $2.6 billion loan based in part on annual recurring revenue, one of the largest of its kind, and announced the purchase for $10.7 billion.

The Anaplan deal was the latest example of what capital market insiders see as the growing influence of the lending arms of private equity firms in financing leveraged buyouts, particularly of technology companies.

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Banks and junk bond investors have been rattled by rising inflation and geopolitical tensions since Russia invaded Ukraine. This has allowed private equity firms to step in to fund deals involving tech companies whose businesses have grown with the rise of remote work and online commerce during the COVID-19 pandemic.

Buyout companies, such as Blackstone, Apollo, KKR & Co Inc. (KKR.N) and Ares Management Inc. (ARES.N)they have diversified their business in recent years beyond acquiring companies to become corporate lenders.

The loans offered by private equity firms are more expensive than bank debt, so they were generally used mainly by small businesses that did not generate enough cash flow to obtain support from banks.

Now, tech buyouts are prime targets for these leveraged loans because tech companies often have strong revenue growth but little cash flow as they spend on expansion plans. Private equity firms are not hampered by regulations that limit bank lending to companies that make little or no profit.

In addition, banks have also become more conservative about underwriting junk-rated debt in the current market turmoil. Private equity firms don’t need to underwrite the debt because they hold it, either in private credit funds or listed vehicles called business development companies. The increase in interest rates makes these loans more lucrative for them.

“We’re seeing double-track debt sponsors for new deals. They’re not just talking to investment banks, but also direct lenders,” said Sonali Jindal, a debt finance partner at the law firm Kirkland & Ellis LLP.

Comprehensive data on non-bank loans is difficult to obtain because many of these deals are not advertised. Direct Lending Deals, a data provider, says there were 25 leveraged buyouts in 2021 financed with so-called single-tranche debt of more than $1 billion from non-bank lenders, more than six times that number of deals, which was just four past year. .

Thoma Bravo financed 16 of his 19 purchases in 2021 using private equity lenders, many of which were offered based on the amount of recurring revenue the businesses generated rather than the amount of cash flow they had.

Erwin Mock, head of capital markets at Thoma Bravo, said non-bank lenders give you the option to add more debt to the companies you buy and often close a deal faster than banks.

“The private debt market gives us the flexibility to do recurring income loan deals, which the syndicated market currently can’t provide that option,” Mock said.

Some private equity firms are also providing loans that go beyond leveraged buyouts. For example, last month Apollo increased its commitment to the largest loan ever made by a private equity firm; a $5.1 billion loan to SoftBank Group Corp (9984.T)backed by technology assets in the Japanese conglomerate’s Vision Fund 2.


Private equity firms provide the debt using the money that institutions invest with them, rather than relying on a depositor base like commercial banks do. They say this insulates the financial system as a whole from its potential losses if a few trades go wrong.

“We’re not limited by anything other than risk when we make these private loans,” said Brad Marshall, Blackstone’s head of North American private credit, while banks are limited by “what the rating agencies are going to say and how banks think about using their balance.

Some bankers say they worry they are losing market share in the junk debt market. Others are more optimistic, pointing out that private equity firms are making loans that banks would not have been allowed to make in the first place. They also say that many of these loans are refinanced with cheaper bank debt once the borrowing companies start generating cash flow.

Stephan Feldgoise, co-head of global mergers and acquisitions at Goldman Sachs Group Inc. (SG.N)He said direct lending deals are allowing some private equity firms to load companies with debt at a level that banks would not have allowed.

“While that may increase the risk to some extent, they may see it as a positive thing,” Feldgoise said.

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Reporting by Krystal Hu, Chibuike Oguh, and Anirban Sen in New York Additional reporting by Echo Wang Editing by Greg Roumeliotis and David Gregorio

Our standards: The Thomson Reuters Trust Principles.

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