Jack Snyder
My name is Jack Snyder. I'm the Head of U.S. Wealth at Antares Capital. I'm excited to be joined today by our Co-Head of Originations, Doug Cannaliato.
Doug Cannaliato
Hi Jack. Great to be speaking with you.
Jack Snyder
We're going to be discussing today our views on the current M&A market and some of the dynamics that are really impacting originations. For those of you that aren't familiar with Antares Capital, we have nearly three decades of experience in direct lending since our founding in 1996 and currently managed around $71 billion in direct lending assets. Doug, M&A volumes are still below historic levels, although we've seen an uptick in recent months. Can you give us a little background and an idea of what you're seeing out there in the M&A market and what we're hearing from some of our top PE sponsors?
Doug Cannaliato
As you noted, M&A activity has been inconsistent during 2023 and even early in 2024 due to economic and geopolitical uncertainty and rising interest rates. These headwinds left buyers wanting lower valuations and sellers choosing to hold on to their assets. However, deal activity has been more consistent in the second half of 2024, and I believe M&A activity is on a path to recovery. The economy is on firmer ground, recession fears have diminished, and our early base case is showing a soft landing for the U.S. economy. Interest rates have started to come down and are set to fall further based on the forward SOFR curve. Other reasons I expect M&A activity to pick up even beyond the moderate activity we're seeing today: there's $620 billion of private equity capital sitting on the sidelines. Private equity firms will be investing this capital. Also sponsors usually hold their portfolio companies 3 to 4 years. In today's environment they're holding companies four and five years. This is just another pressure point. And finally, we're asking our sponsors, right, how many companies do you plan to sell in the next 12 months? We're consistently hearing their intentions to sell multiple companies in 2025, and I think this is our most reliable indicator. Anyone can speculate, as I just did with regard to market forces, but sponsors know the upcoming activity in their own portfolios.
Jack Snyder
Doug, thanks for that color. In a weaker M&A environment, how are private credit managers able to successfully originate?
Doug Cannaliato
While M&A activity has been slower, there remains attractive deployment opportunities for private credit managers. In the last 18 months, even with reduced new deal flow, private credit managers overseeing large portfolios have continued to find strong opportunities to deploy new dollars to existing portfolio companies. A notable example of this is the steady pace of add on acquisitions. These smaller acquisitions typically transact at lower multiples than the initial platform company, and this allows portfolio companies to be willing to pay full multiples for add-ons while still averaging down their overall multiple. It's also important to highlight the growing popularity of private credit. The private credit markets expanded, and this has been a tailwind for capital deployment. Larger companies that used to exclusively access the broadly syndicated loan market are now considering and often choosing private credit solutions. Year to date, private credit solutions accounted for 85% of LBO financing activity. Borrowers and private equity firms are frequently willing to pay a premium for the certainty, speed, and confidentiality that private credit solutions provide.
Jack Snyder
So, Doug, it's an important consideration when evaluating a private credit manager to really evaluate their ability to originate in all markets. If you take a look at the underlying portfolios out there in the wrappers in which you can access private credit today, you've often seen BSL positions creep up as well as leverage, you know, move down. A lot of that leads to a firm's inability to originate and potentially coupled with mass inflows, an inability to keep up with retail inflows, or just inflows in general. What are some of the key attributes that investors should really consider when evaluating a private credit manager and their ability to originate in all markets?
Doug Cannaliato
Sure. In my opinion, there are two critical factors. Scale and consistent long-term market presence. Regarding scale, credit managers with scale can blanket the market to source a very large funnel of transactions, and this enables them to be highly selective as they build diverse creditworthy portfolios. Credit managers with scale also benefit from incumbent deal flows, I previously mentioned. Incumbent deal flow provides early access to attractive financing opportunities, whether for incrementals, refinancings, or for sales. Incumbent deal flow also makes it easier for credit managers to make informed, sound credit decisions. These credit managers have more informed view of these companies. They have seen these companies perform by tracking monthly or quarterly financials. They know the management teams, and they have proven out the value propositions they initially underwrote. Regarding consistent, long-term market presence, well at its core, private credit’s really a relationship business. Managers with long-term market presence who have been thoughtful, reasonable partners to sponsors in their portfolio companies, through multiple business cycles, have a significant advantage over newer and smaller players. These established, trusted relationships often result in first look and last look opportunities for financings.
Jack Snyder
Doug, thank you for your thoughtful comments today. One of the real benefits of investing with Antares is that incumbency that Doug spoke of. Since 2016, on average, we've originated roughly $20 billion a year, and 70 to 80% of that origination comes from that incumbency. It's a real strength of Antares. Again, today, we're here to educate on what's happening in the direct lending market. If you'd like to speak with someone from our investment team, we would love to set up a call and further the conversation. So, thank you for joining us today, and we look forward to seeing you on our next video.