On November 14, 2013, the Philadelphia office of Drinker Biddle & Reath LLP hosted its 7th annual roundtable discussion entitled “The State of the Debt Markets in Private Equity Transactions—Exceeding Expectations in 2014.” At the roundtable, representatives of private equity sponsors, senior lenders, mezzanine lenders and investment bankers participated in a discussion with Drinker Biddle’s private equity and corporate finance lawyers.
This roundtable discussion was preceded with opening remarks by two speakers. Michael Pyle, a Special Assistant to the President for Economic Policy at the White House's National Economic Council, opened the program with an overview of some of the policy initiatives under review in Washington that could impact the U.S. economy as a whole and the private equity markets as a result. [While acknowledging that the recent congressional standstill may have led to uncertainty in the market, Mr. Pyle was optimistic that many of the policies that the federal government is pursuing will be able to provide a more stable backdrop for economic growth. Among other things, Mr. Pyle noted efforts being made to create policy that encouraged private sector investment in infrastructure.]
Steven Kneeley was the second speaker at the event. Mr. Kneeley is the CEO of Spider Management, which manages approximately $3 billion in assets, including the endowment of the University of Richmond (approximately $2 billion). Mr. Kneeley was able to provide some insight into the current view of endowment managers. [Among other trends, he noted an increased focus by endowment managers on quality and track record of the private equity funds to which they allocate assets.]
Following the introductory remarks, there was an open discussion among the bankers, the P.E. sponsors and other guests. The discussion focused on both the current climate for deals and expectations for the future. Below are some highlights:
The conversation began with a discussion of the effect of the government shut-down and the short-term fix for the debt ceiling and budget. Although multiple participants noted that the federal budget concerns have slowed economic recovery, the prevailing view was positive with an expectation that the impending January 2014 budget discussions will not stop mergers and acquisition activity in the middle market.
The discussion turned to the effect of availability of capital coupled with increasing regulatory constraints. The participants noted that deal terms for middle market debt have approached pre-crisis (2006) levels, but notwithstanding those looser terms, there remains significant discipline among lenders. Representatives of multiple commercial banks indicated that new regulations on leveraged loans by banks have led to an increase in transactional costs for banks and a rise in the amount of competition from non-bank lenders that are not subject to the same constraints. This view was corroborated by the private equity representatives in the room based on their recent borrowing experiences. Both bankers and investors in the room indicated that the regulatory initiatives of the post-crisis era are increasing transaction costs on all deals and some of the sponsors commented that initiatives that were intended to address problems created at the top end of the market may provide very little public benefit as applied to middle market players.
The discussion closed with buy-side professionals sharing their views on strategies for dealing with a market flush with capital but restrained by regulation. There was a consensus that companies being bought and sold in the market are selling for full value and that the excess capital has limited the number of under-market purchase prices available. Some sponsors noted, though, that there is a reluctance to enter into a sale process when there is uncertainty in performance due to larger economic concerns as no one wants to initiate such a process if the portfolio company performance is at risk of failing to meet projections. On the buy-side, some sponsors noted that in this environment, buyers are focusing more on companies that have good growth potential and on supplying management expertise to drive that growth.
We will continue to monitor trends and developments in this area. For more information on the matters discussed in this Alert, please contact one of the Corporate & Securities lawyers listed above, or your regular contact at Drinker Biddle.