USA Trends and Developments Contributed by: Nicholas A Dorsey, Ryan J Patrone, Kelly M Smercina and Margaret R M Rallings, Cravath, Swaine & Moore LLP
Borrowers have been increasingly eager to accept direct loans from private lenders. In addi- tion to the potential for increased speed of exe- cution relative to syndicated transactions, direct lending transactions now offer pricing terms and covenants that are substantially similar to those traditionally found in syndicated transactions (as opposed to the early days of direct lending, when terms were more lender-friendly). When combined with the more cautious approach to underwriting taken by US banks in recent years, it is not surprising to see the continued rise in popularity of direct lending as a source of acqui- sition financing. In 2024, the direct lending market continued to thrive. Consistent with overall lending and acqui- sition financing trends, direct lending volume was lower in the first half of 2024 but increased over the course of the year, more than doubling 2023 levels, ending the fourth quarter with over USD390 billion in deal value. Unitranche loan activity (a hybrid loan structure blending senior and subordinated debt into one loan agreement) is common in the upper end of the direct lending market, and surged to USD210 billion in deal val- ue. Large corporate unitranche volume (defined as loan packages of at least USD500 million) grew to USD154 billion in deal value, with jumbo loans (defined as loans of at least USD1 billion) rep- resenting approximately half of large unitranche loan volume. Refinancings and repricings made up 48% and 8% of volume, respectively. Direct lending has also secured a significant share of the acquisition finance market in recent years, especially in leveraged buyouts where banks are under greater restrictions. Specifi- cally, in 2024, leveraged buyout direct lending increased 66% from 2023 to USD55 billion, with direct lending capturing 90% of middle market leveraged buyout activity.
The growing popularity of direct lending has brought increased competition, as private equity firms have strengthened their direct lending arms and investment banks have begun to establish (or, in some cases, increased their focus on) direct lending practices in light of declining syn- dicated lending. Industry tie-ups are becoming more common, with 2024 marking an accelera- tion in collaboration between traditional banking institutions and the non-bank participants who have historically operated in this arena. Among other examples, Apollo announced its entry into an exclusive agreement with a subsidiary of Citigroup Inc. to form a landmark USD25 billion private credit, direct lending programme. These strategic partnerships bring together the existing relationships and network of traditional invest- ment banks with the extensive capital available from private lenders. Equity financing Facing challenging debt financing conditions in 2024, many acquirers have chosen to finance acquisitions by tapping into their capital reserves and writing larger equity cheques as an alterna- tive to obtaining third-party debt financing. Over the past decade, the level of “dry powder” (amounts for which private equity funds have investor commitments, but which they have not yet invested) in the private equity market has steadily increased throughout the world. The private equity dry powder level in the United States remained at a substantial level in 2024, ending the year at over USD1.1 trillion. With so much excess capital at their disposal, and in light of relatively high inter- est rates and somewhat volatile debt market con- ditions in recent years, private equity firms have become increasingly likely to finance acquisitions using a greater portion of their own funds.
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