An uptick in deal activity is expected later this year, after a lacklustre first half amid US policy uncertainty.
Dealmakers have been cautious due to US President Donald Trump’s ‘Liberation Day’ on 2 April this year and ever-changing tariff announcements.
“Out-of-the-box acquisition financing is generally down compared to previous years – I think the data suggests it’s been the slowest first half since Covid,” said Kirstie Hutchinson, partner in the finance team at law firm Macfarlanes.
“People were cautiously optimistic about transacting at the start of this year, before the fresh volatility triggered by US tariffs uncertainty kicked in. If you don’t have stability for a clear enough line of sight, it’s difficult for people to transact.”
Hutchinson, who deals predominantly with private equity sponsors, said that “the drivers are there for new transactional activity” although she noted that “sponsors are thinking very carefully about processes ahead of the fourth quarter”.
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“I would hope markets will smooth sufficiently if there are no new geopolitical shocks – but as we’ve seen over the last few years, that risk can’t be dismissed,” she added.
A turn in the cycle
There have increasingly been warnings from industry onlookers about a turn in the cycle that could impact the stratospheric trajectory of private credit. Critics argue that the sector – which came into its own following the 2008 financial crisis when banks retrenched from lending – has not yet been substantially tested in a downturn.
While default rates will inevitably rise amid challenging macroeconomic conditions and a higher interest rate environment post-pandemic, Hutchinson said, “I don’t see a financial Armageddon on the horizon”.
“There are increased default rates and we’re in time of flux,” she added. “AI is changing things up. But this is an inevitable part of the cycle. Some businesses will fail. Some people will see an opportunity and take those businesses on, with new strategies, and will need debt funding. Private capital is ably poised to provide it.”
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Bad businesses are no longer being propped up with ready credit, she explained, noting that more lenders are actively taking control in a higher default environment.
Hutchinson also highlighted changing terms in the current market, such as the demise of amortisation or cash sweeps in loan documentation.
“Everyone has a payment-in-kind toggle,” she added. “Non-call periods have settled down. Accordions feature consistently, as everyone wants the infrastructure in place for follow-on money. Bolt-ons as a strategy show no sign of abatement.
“That’s probably another reason for the popularity of continuation vehicles – if you are pursuing a thoughtful buy-and-build strategy, clearly you may want to hold on to the asset for longer in order to optimise growth and the eventual outcome.”
Hutchinson also noted a rise in debt refinancing of equity investments, where firms capitalise on opportunities quickly by acquiring an asset with equity partly sourced from short-dated liquidity, and then replace that with leveraged debt up to a year later.
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