Justin Mitchell
Today we are speaking with Tim Lyne, the CEO of Antares Capital. How has the Fed's hike in interest rates over the last year or two changed kind of the private debt space?
Timothy Lyne
On the one hand, you would argue that the space is more attractive, and there are many investors throughout the world that are searching for yield, and given that floating rate nature of private credit, it makes it very attractive. And once again, because its senior, private equity owned companies, all of that makes it attractive. The part that maybe is a little bit that concerns folks is the macroeconomic environment and the potential increase in defaults and losses, and I think there will be, without a doubt, there will be an increase in defaults and losses given the macroeconomic environment kind of right now and over the next kind of 18 months, but the increase in yield with SOFR having increased, let's say, almost 500 basis points, that more than compensates for the potential increase in defaults and losses.
Justin Mitchell
The pace of mergers and acquisitions right now is pretty slow in the private markets, as everyone knows. What do you think could possibly pick that pace up?
Timothy Lyne
At some point, the sponsors need to capitulate. So, there's a lot of companies out there that in private equity portfolios that need to be sold, and in order for that to happen, where they begin selling those companies and M&A volume picks up, those private equity sponsors are going to need to accept lower returns than what they had originally underwritten, what they had expressed to their investors at recent investor meetings.
Justin Mitchell
How likely do you think it is that that happens?
Timothy Lyne
I think it's actually quite likely. The limited partners are being asked, in many cases, to commit to new funds with those private equity sponsors, but the limited partners are saying, I'm not going to commit to a new fund until I see some distributions on your previous fund. So, I think in essence, that's what's really going to force the issue, is the sponsors are going to, they want to show distributions, so they're going to be selling these companies for lower purchase prices than they expected.
Justin Mitchell
Tim, thank you so much for speaking with us today.
Timothy Lyne
Thanks for having me, Justin.