USA Law and Practice Contributed by: Stelios Saffos, Dan Seale, Peter Sluka and Alfred Xue, Latham & Watkins
ming from the fast growth of the private credit market. Private credit lenders have sharpened their focus on liability management issues, par - ticularly following the Pluralsight drop-down of assets to ensure that the erosion of terms does not become commonplace in the market. 1.5 Junior and Hybrid Capital The primary product for private credit providers remains the unitranche facility. However, private equity sponsors have also turned to private cred - it lenders for a variety of creative hybrid financ - ing packages including Holdco facilities, mezza - nine debt and junior capital positions to provide additional liquidity to support acquisitions in the United States without sacrificing leverage levels. Private equity sponsors in the United States have been increasingly taking advantage of debt-like, non-convertible preferred equity in order to supplement the liquidity of the operat - ing company within the corporate structure, with the preferred equity allowing sponsors to incur additional leverage without the burden of cash interest payments (as these products often have a payment in kind (PIK) feature). 1.6 Sponsored/Non-Sponsored Debt Private credit providers are primarily focused on private equity sponsors and their portfolio com - panies. At the same time, private credit solu - tions also support emerging growth companies and non-investment grade corporate borrowers (including public borrowers). By contrast, private credit providers are not particularly active in the investment grade space. Yields are therefore often insufficient to satisfy a private credit pro - vider’s investment strategy. 1.7 Recurring Revenue Deals and Late- Stage Lending Recurring revenue deals are still a relatively new innovation allowing lenders to finance growth-
stage companies that have low or negative earnings before interest, taxes, depreciation and amortisation (EBITDA). Amid the increas - ing interest rate environment in the back half of 2022 and throughout 2023, the number of recur - ring revenue deals coming to market slowed dramatically. This last year, however, saw the re-emergence of these transactions both in the context of new take-private acquisitions (includ - ing Vista’s closing in Q1 of EngageSmart) and the private M&A markets. 1.8 Deal Sizes, Fund Sizes and Fundraising Overall transaction size between private credit transactions and syndicated matters has con - tinued to converge further. Private credit con - tinues to see a greater number of jumbo deals at market. The private credit asset class continues to attract investor interest. In the last 12 months, tradi - tional banks have pushed further into the private credit space via partnerships and also internal focus on private credit solutions. Additionally, the continued enthusiasm for private credit has spurred a wave of consolidation (including Blackrock’s planned acquisition of HPS Invest - ment Partners). 1.9 Impending Regulation and Reform With a new US administration, the Federal Trade Commission (FTC) and the Justice Department more broadly are expected to reduce regulatory scrutiny around M&A and financial services. Accordingly, many are anticipating a robust year for the M&A markets with private credit serving to support many transactions.
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