The Wrong Golden Age

Why the Golden Age of Private Credit isn’t just about Unitranche Debt

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Welcome back!

We’ve all heard about it - the Golden Age of Private Credit. It’s been primarily hyped up by unitranche providers who are talking their book and hyping up all the growth and opportunity they’ve seen in providing debt financing that was historically placed by banks. We’ve seen private credit take down some massive unitranche deals – including $4.8B for Finastra, $3.75B for Zendesk, and $3.2B for Hyland Software. But there’s much more to the story than Unitranche solutions.  

Here are the other beneficiaries and winners of the golden age - as well as some of the “creative” financings you’ll see in the world of private credit:

1. NAV Loans

NAV loans have been the talk of the town lately. Recently, Apollo (APO) gave Warburg a $1B NAV loan that was used to pay down bank facilities.

But what are NAV loans? First, NAV = “Net Asset Value” or Assets - Liabilities divided by shares outstanding. NAV is referring to the net value of the private equity group’s fund. So a NAV loan is a loan backed by the net asset value of a private equity group’s fund; which encompasses the portfolio companies within the fund or the cash flows/distributions from the fund. The idea behind NAV loans is that proceeds can be used to help give LPs liquidity, for new investment capital, or to solve funding gaps like I’ll speak to in the next paragraph.

While the APO x Warburg transaction is the most recent example, Vista Equity took down a $1B NAV loan led by GS in order to complete a $5B refinancing of Vista’s portfolio company, Finastra. Instead of writing an additional equity check or further tapping private credit, the Sponsor preferred adding a $1B NAV loan to the mix. Blue Owl, Oak Hill, and HPS were part of the group that provided the massive $4.8B Unitranche term loan, which priced at S+725 (~12.6% yield at the time).

Bloomberg reported that the GS led NAV loan is backed by Vista’s Fund VI, which ofc includes Finastra as a portfolio company. Another key thing is rates: Bloomberg reported in there that NAV loans are typically 500-700bps over a base rate and lent at up to ~30% LTV. However, some are getting to rates as high as 19% and have LTVs closer to 50%.

While APO is a large investor in the space, other investors in the small, but quickly growing space, include AlpInvest Partners (Carlyle backed), 17Capital (Oaktree backed) and Hark Capital.  

What are the risks associated with NAV loans? 

You’re valuing illiquidity: you’re saying “these companies must be worth xyz net amount” without having actually monetized or transacted. “We can sell this business at 15x on $1B EBITDA” – okay, then why haven’t you? It might actually be worth 12x on $850mm of EBITDA, providing a less compelling return. Or maybe a company that is a part of the collateral can’t transact at all, making the LTV you thought you lent at significantly higher. Leverage: The introduction of cross-collateralized investments can make things even worse in a downside scenario. Fund returns can potentially get even worse with the layering of even more debt that squeezes away at the size of total equity returns. But that’s just like every leveraged transaction, I suppose. Still, potentially sinking the boat over a heavy anchor or two you needed to throw overboard may not be appealing for LPs. This brings me to my next point - Allocators might not like it: Well, unless they get their money back at a nice rate of return – but a decent chunk of allocators likely will not be a fan of the extra layering of debt and added complexity. Some allocators spoke on it here, voicing “that’s leverage on leverage.” Rates: With NAV loans at 12%-14%, but as high as 19%, you’re certainly paying a CCC type of fee. Compared to how cheap secured dividend recaps could occur in the loan or bond market (plus they’re presumably more easy to refinance), this is a pricey payment and maybe you’re better off waiting for a better dividend recap scenario.

However, look - if lending standards tighten and deal flow remains tight, NAV loans are a viable option on the table to distribute cash to LPs and to solve funding gaps.

But is this a good deal?

It depends - and it primarily depends on the cost of capital and LTV: if you’re in a scenario where you’re actually getting rate arbitrage and LTV is reasonable, then it works out. If this is a late cycle, higher rate “lender of last resort” or “amend and pretend” behavior, then Sponsors will be walking a tightrope. But I say it depends, because it’s up to the specific Associate cranking away at IRR to determine whether this makes sense or not. Ultimately, so long as rates remain high and fundraising remains challenged, I expect NAV loans to continue.

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2. Being Opportunistic or Being Creative:

How we bucket this opportunity set varies greatly. Some funds have a mixed focus on private credit AND the public markets where they switch around depending on deal flow. Another point I want to highlight here is how Private Credit in general does some funky deals. My point being, credit deal flow seems to favor those who think about things “creatively”.

I really liked this interview I did with an anon opportunistic credit analyst. (P.S. – I want to do more interviews like this in the future so feel free to DM me if interested). A key takeaway was that funds with flexible mandates, and those who are nimble and able to respond quickly to situations are going to be the winners.

An example of a very off the cuff deal includes the Carlyle Group lending to South Park. Ya you read that right.

The $800mm Unitranche due in 2029 priced at S+675 with an OID of 98 and was used for a refinancing of a $600mm loan HPS made, plus a dividend recap. The loan is backed by the IP from South Park, plus some related real estate properties. While less of an opportunistic deal, this type of odd financing transaction can only be done by creative private credit folks.

An interesting trend recently has been seeing who is coming to write a check after a bankruptcy filing. Apollo’s DIP proposal to Yellow Corp was a fascinating one for example. When Yellow Corp, the 3rd largest U.S. trucking company filed earlier in ’23, APO was there to provide exit financing. The deal didn’t close as Yellow was able to get a better offer, but it was a fascinating look at DIP financings that are a little more opportunistic in nature and face competing term sheets.   

APO was offering Yellow $142.5mm in DIP financing at 17% interest plus a closing fee in the $7mm-$32mm range, per FT. This didn’t go over well broadly, and with a cheaper option getting mulled, APO exited their old $500mm TL to the company, selling it to Citadel.

Should defaults rise, I expect continued “creative” rescue financing solutions among various credit shops.

Taking a look at the Maturity Wall: 

As the need to refinance draws closer, there should be decent deal flow nearing soon. To give a sense of the paper that needs to be refinanced over the near term, refer to this graphic from MUFG 


As you can see, ’25-’26 are the biggest focus points for issuers to deal with, while I would characterize as ’28 as enough runway for the bulk of issuers with maturities then. The “zombie” issuers with maturities coming due over the next 36 months (assuming rates don’t tank and performance doesn’t improve) will have to find creative solutions to rightsize the cap stack or refinance.

This of course is also an opportunity for lender on lender violence to take place. I talked through the trend broadly, as well as uptiers and dropdowns in this piece here and will have a separate piece on double dip financing coming in February.

3. Hung Debt/Buying from Banks

Note, Hung Debt = Debt (Term Loans, HY Bonds) that Banks sought to syndicate to other lenders, but due to either poor credit quality or credit market volatility, they were unable to syndicate and are stuck with the debt on their balance sheet.

The big hung debt out there today is Twitter/X and Brightspeed. Banks have been able to offload a decent amount of deals, but syndicating X continues to allude them as advertising revenue remains ~50%+ below prior year levels.

I cited in a prior newsletter how Apollo was able to turn a $2B distressed credit investment into $14B over a five-year period. Back in 2008, Apollo co-founder Josh Harris spearheaded the effort of buying hung LyondellBasell bank debt in ranges of 20-80 cents on the dollar. When Lyondell filed, Apollo was able to convert their debt into a large equity stake that would later rally significantly.

Hung debt, and buying debt from banks, also isn’t exclusive to hung Term Loan Bs and Bonds – it can also include revolving credit facilities and asset-backed loans.

Ares raised $6.6B (more than the $5B initial target) for Pathfinder Fund II, their 2nd asset-backed credit fund that invests in pools of assets including auto loans, credit card receivables, and other higher capital charge liabilities it can buy in a pool/pools from banks. Given the higher capital charges, there are many instances where banks will want to offload less productive loans to free up capital. I’ll get a little more into this trend when I talk about Basel III, but coming out of a regional banking crisis, opportunistic strategies like this should thrive.

For example, back in June, PacWest Bancorp, reeling from the regional banking crisis, sold a $3.5B ABL portfolio to Ares. For Ares, they got a sizable portfolio at a discount, while PacWest got to shore up liquidity and prep themselves for their sale to the Banc of California. 

Another way to think about buying hung debt is via Significant Risk Transfer “SRT”. As banks get stressed with regulatory capital requirements, SRT funds take on the credit risk of the loans, earning a premium from the Banks (which is a nice and stable CF), but freeing the bank’s regulatory capital. Normally, these structured products include a pool of loans, which helps with diversification and mitigating credit risk. SRT has been seeing returns north of 10%+ in 2023.

SRT can still = buying hung debt depending on how each firm defines SRT, with most groups having a big focus on corporate loans. Some SRT lenders can earn mid to high teens returns. Hung debt purchases don’t necessarily have to be Twitter or Brightspeed either - anyone from SMB serving banks to middle market banks can have hung term loans they’d like to derisk from.

However this strategy feels like a somewhat counter cyclical one - where you’re able to get higher returns during high periods of stress, but lower returns during “good times”.

4. Direct Lending Workout Teams

While not a specific strategy - it’s the golden age of direct lending workout teams! I’ll touch on this just briefly, but given how quickly the market has grown (and how many poor deals will eventually start breaking), hiring has picked up and it’s a great time for people to make names for themselves fixing broken deals. The way workout guys and sponsors interact will be highly interesting though.

As many of you know, “Amend and Pretend” is a play on “Amend and Extend” – making fun of lenders extending a crappy deal so long as they’re continuing to put capital to work and are able to slightly improve terms. Given how relationship-driven direct lending is, the balance between maintaining a relationship and taking the keys is going to be tested this cycle.

5. Credit Secondaries

Credit Secondaries is the last strategy I’ll focus on – it’s basically a fund designed to scoop up LP stakes. This is a way for Credit LPs, that want to diversify away from a particular strategy, to find liquidity. LPs changing around their allocation goals, getting caught offside a bit on a certain strategy, as well as potential impatience waiting around several years to recoup par may be drivers in LPs selling. Credit secondaries funds will use this opportunity and lack of liquidity to buy their stakes at a relatively attractive price point.

Several different types of firms, such as Sponsors, Lenders, and even Banks have all allocated money toward growing their credit secondaries business. Examples include Apollo, who is targeting $2B for their 2nd fund, and JP Morgan.

It’s hard to ding this market, because hey if you can buy private credit LP stakes at 85-90 cents on the dollar, you can “eat” a nice IRR depending on your timeline and assuming you’re money good (which you probably are).

This chart from Cleary Gottlieb and data from Coller Capital shows a look at how credit secondaries have burst onto the scene.

2023 was full of credit secondary investors pounding the drum. This chart from Jefferies below gives a great look at how LP stake pricing has changed over time. Compared to buyout funds, other strategies have traded at more of a steeper discount due to fewer buyers and in order to meet buyer investment hurdles. As more buyers enter and as the investment outlook gets better, I would presume that this discount would come in a bit, but we’re presumably early innings on seeing how this shakes out.

Via Jefferies

Private Credit growth should continue - due in part to regulatory tailwinds: 

While the Fed quickly resolved the Regional Banking Crisis, the fall of Credit Suisse, Silicon Valley Bank, and First Republic slipping into the rear view mirror shows how quickly we forget about risks in the lending environment.

Lending activity continues to tighten, per SLOOS, further stressing financing solutions for homes, autos, and credit cards. From a Company standpoint, as banks have pulled back on corporate loans, Private Credit and less regulated solutions are taking on the opportunities as a result.

But let’s talk about the Basel III Endgame (B3E)

B3E is a framework that’s been in the works for a while following the global financial crisis. This is the “endgame” (but not cool like the Avengers) of implementing standards that make the banking system better equipped for managing credit and market risk.

In a nutshell, the largest U.S. banks (The 8 banks with $100B+ in assets) will have their capital requirements increased by 20%+. Opponents against this move warn that increased capital requirements will raise interest rates and create higher hurdles toward lending activity.

There’s still time to see what happens – the proposed compliance date would start in July 2025, giving banks as of now a ~18-month runway to add the infrastructure needed to comply. James Gorman, the old CEO of Morgan Stanley before the GOAT CEO Ted Pick took over this year, noted that he thinks the stiffness of this regulation will be materially dialed back, but we’ll be in a wait and see mode until we see what shakes out.

Separately, there is also a lot more regulation coming to regional and midsized banks. Banks with assets of $50-$100B and $100B+ respectively would be required to provide more information to regulators, as well as shore up their balance sheets. Banks with $100B+ of assets would be required to increase their holding company long-term debt levels in order to shore up their liquidity. Fitch had a good piece on it here.

This move stems from the fallout related to Silicon Valley Bank, and seemingly doesn’t necessarily relate to the idiosyncratic poor treasury management and underwriting to garbage tech companies that drove SVB to its end. VCs quickly turning on SVB after years of using them as a piggy bank continues to be one of the funniest caricatures of Silicon Valley.

So who wins if banks have to tighten lending? Well, obviously those that are free from this type of oversight! Drumroll please….Private Credit! Not being subject to the same type of capital, risk management, or regulatory requirements while having a lot of dry powder and being able to regularly raise $$$ from investors is the perfect type of set up to take advantage of dislocations in the private markets.

While the Fed provides generic language about the risks of private credit (they do likewise boilerplate risk commentary for leveraged loans too), given the “shadows” of the private markets, any troubles with private credit are less likely to be a front page headline. Obviously, private equity is prone to front page risk, but private credit can operate a bit more in the shadows on this. I don’t think a legislator from a random swing state has “the rise of private credit” as a main worry of their constituents. So it’s hard seeing near-term changes to the regulatory regime that slow private credit down. Especially since regulation is usually reactive.


It’s currently an exciting time for private credit. Deployed capital will solve a lot of refinancing and M&A needs over the coming year. While there are some pockets set to thrive, myself and several other market participants expect that pockets of private credit will become naturally challenged due to weaker credit quality.

There are real tailwinds in this space, especially given increased banking regulations, but if we do get a soft landing then bouts of volatility and economic uncertainty will decrease, potentially making ’22 and ’23 as the “best of times” for these offerings. However, if the credit environment continues to weaken, expect these types of offerings to earn outsized returns relative to how they’ll perform in a lower rate, economically stable period.

Harry’s Corner:

  • I posted for HYH Premium Subs last week A Miami City Guide which had 140+ private equity, credit, family office, hedge fund, VC, and other finance firms on the list. Why am I doing pieces on funds in different cities? Well, maybe you want to move there from NYC. Or maybe it helps with deal flow and gives you some new lenders or sponsors to reach out to. A Texas Guide for HYH Premium Subs is coming soon.

  • Credit Jobs: Every Newsletter I look for some interesting credit related jobs that I see online. Marathon is hiring a Direct Lending VP. Invesco is hiring a Distressed Credit Associate.

  • My annual Comp Survey is coming in March. Stay tuned for more details as I’ll need your help on it soon. Last year’s survey is here

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