Private Credit Getting Loose 

• Demand heats up: Investors are clamoring for more private credit deals and private lenders are struggling to satisfy demand with current deal flow. Meanwhile, investment banks continue to snatch loans off their books through broadly syndicated loan refinancings.  

• Features: To make their loans more enticing private lenders are increasing their use of borrower-friendly features (1). They are increasingly willing to use paid-in-kind interest to reduce the strain on borrowers’ cash flow and are offering larger delayed draw term loans, so borrowers have additional capital committed for the future if they meet specific financial thresholds.  

• Covenants: Deals with more than two covenants are usually reserved for special situations nowadays. The market typically calls for two-covenant deals, and high-quality borrowers are issuing debt with a single covenant (1). Having a narrow covenant package can inhibit the ability of a lender to intervene early when a borrower isn’t performing well, potentially decreasing the recovery rate in the event a borrower isn’t able to repay the loan.   

• Pricing: Credit spreads are expected to continue tightening due to increased competition for quality deals. In a recent Pitchbook survey, 67% of respondents indicated they would expect a 40% LTV loan to a $50M EBITDA business to be priced below S+550. Asked what they would expect in six months, that figure increased to 77% (2).  

Sources:  

1. Pitchbook 

2. Pitchbook survey 

3. Preqin: The Future of Private Capital Performance – November 2024 (PDF) 
4. Financial Times  

New Ways to Tap into Private Markets 

You’ve already read about The Democratization of Private Markets, The Great Wealth Transfer, and Tokenization, so we won’t dive into that here. Rather, we’re homing in on companies at the forefront of two new approaches to private investing that hinge on these aforementioned themes. Their products are designed to provide greater accessibility, increase liquidity, and appeal to an incoming generation of tech-savvy investors. 

Tokenization: Securitize has positioned itself as a leader in the tokenization of real-world assets, having already converted $1B worth of private equity, private credit, and venture capital investments into digital tokens stored on the blockchain. The company has partnered with leading investment firms like Hamilton Lane and KKR allowing you to, for example, buy into an evergreen private credit fund with $10K directly through their online platform (1).  

New Product for the Wealth Channel: BlackRock and Partners Group have joined forces to offer high net worth individuals an easier way to invest in private assets. Their new investment product is being added to the menus of wealth advisors and allows investors to access a broad range of funds by signing a single subscription agreement and choosing from three risk profiles (2). Notably, it will include a rebalancing feature (3), something we’ve historically seen only in portfolios of public investments. KKR and Apollo have formed similar partnerships with public markets counterparts to bring their products to a wealth advisor near you.  

Sources: 

1. Securitize 
2. Private Debt Investor 
3. Partners Group 

Policy & Private Markets: An Evolving Landscape

With a new Congress and Presidential administration taking office this month, our eyes are on potential developments in the policy sphere and how these changes may be poised to alter market dynamics. While Republicans will hold power in both legislative houses as well as the Presidency, the majority is narrow which will make sweeping changes more difficult. Taking a look at specific impacts on the venture capital (VC) and private equity (PE) spaces, we’ve isolated a few key areas to watch as legislative priorities emerge in the early days of the new administration.

Tariffs

The Trump campaign made tariffs a signature issue throughout the election cycle, promising as much as a 60% tariff on goods imported from China, and blanket tariffs on goods from other countries (including Mexico and Canada). Tariffs represent an area in which the executive branch holds significant authority to effect policy change. As a result, tariffs are one of the more likely campaign proposals to be successfully enacted. (Council on Foreign Relations)

For private companies, tariff impacts will certainly be felt. Imported goods are a critical part of the supply chain, and tariffs will mean increased costs and lower margins. Additionally, any retaliation from trading partners will decrease global market access for American companies.

Furthermore, the macroeconomic implication of broad tariffs will be increased inflation. With a rate cutting cycle underway and inflation moderating, these favorable conditions could be threatened by resurgent inflation. For private companies that have already faced a brutal fundraising environment in recent years, greater macroeconomic uncertainty and a hawkish approach to rates would create even more pressure. Improving capital availability will be critical to boosting VC and PE markets, and tariffs would push that goal further out of reach.

Source: CFR “What are tariffs?”

FTC Leadership Changes

On a more positive note, changes pending at the Federal Trade Commission (FTC) could create tailwinds for VC and PE. Exit activity has been muted, with 2024 exits poised to come in below even 2023’s modest count (Pitchbook). Biden-appointed FTC Chair Lina Khan has driven a regulatory regime since 2021 that made antitrust and competition policy a core focus. Heightened scrutiny from the FTC is, in part, responsible for a dampened M&A environment, with the largest technology companies being particularly affected.

President-Elect Trump has promised to replace Khan, though that initiative may take some time as the position requires a confirmation process. A new, Trump-aligned FTC Chair will likely take a more relaxed view of corporate M&A. With acquisitions representing a key exit avenue for VC and PE, such a shift could open up the exit market and begin a cycle of returning capital to investors. In turn, these investors will be able to redeploy into new investments in the asset class, helping to bolster fundraising and performance across the board.

We view the change in FTC leadership as a high-probability outcome, although the uncertainty lies in the timeframe in which the new administration will be able to execute on this plan.

Fiscal Policy

While fiscal policy includes a range of complex factors, we would like to highlight two particularly relevant issues that are likely to arise early in the administration. Both will markedly impact VC and PE, if enacted.

Corporate Taxes

President-Elect Trump and Congressional Republicans have proposed lowering the corporate tax rate, mirroring a key legislative victory from Trump’s last term. The 2017 Tax Cuts and Jobs Act cut the corporate tax rate from 35% to 21%. Extending these tax cuts will be a central goal for the new majority. During the campaign, Trump suggested support for a further cut to 15%, though with such a slim majority he may not be able to garner sufficient support.

Maintenance of the 21% tax rate, or any further cuts, would bolster profits. The favorable effects of such a policy would be felt to a greater extent by more profitable businesses, while pre-profitability ventures would benefit less. However, increased cash reserves for larger corporations can also boost appetite for acquisitions, adding further fuel to the exit landscape for these smaller companies.

An extension of the 2017 tax cuts appears likely, with further cuts plausible but far less certain.

Inflation Reduction Act

On the spending side, possible changes and cuts to the Inflation Reduction Act (IRA) of 2022 could have an outsized impact on VC and PE. Large swaths of IRA spending are earmarked for clean energy incentives, a sector that has driven huge amounts of VC and PE activity in recent years. The IRA authorized an estimated $392B in clean energy and climate spending between 2022 and 2031. While some of these funds have already been allocated, a large proportion remains.

If changes are made to the planned IRA spending, the clean energy sector stands to lose a meaningful tailwind. These changes may come in a couple of forms.

One possibility is a slower rollout from the executive side. The Executive Branch is charged with implementation of many IRA policies, conducted through the White House Office on Clean Energy Innovation and Implementation. The Trump administration may pull back on these efforts or even disband the Office entirely.

The second possibility would be a partial or full repeal of the IRA through Congress. There is some evidence to support this outcome, as Republicans have voted 53 times in the House and once in the Senate to repeal parts of the IRA as of October 15, 2024. However, these initiatives have faced some pushback given the large proportion of IRA incentives granted to red states and districts. Any repeal or constraints made to the IRA would likely reduce the volume of clean energy incentives offered in the coming years.

Based on the current political dynamics, a slowdown in implementation from the Executive Branch appears more probably than repeal, but repeal is certainly possible.

Source: Brookings Institute