Ted Koenig weighs in on Monroe’s biggest fund close; deal flow slowed in Q1

Good morning, dealmakers. MK Flynn here with the Wire.

PE Hub reporter Aaron Weitzman is in Las Vegas for ACG’s InterGrowth conference with his ear to the ground.

Here are some of the comments he’s heard this week:
“Deal flow has been slow this year, in large part due to all the noise – supply chain, inflation, rising interest rates,” a managing partner of a New York PE firm that invests in lower middle-market companies told Aaron. “It seems like people are being picky and cautious with this choppy market, but we really do think it will pick up in the second half of the year.”

Said a managing partner of another lower middle-market firm based in Connecticut: “A lot of people in this industry do not have experience with a rising interest rate environment. If rates are going up, multiples are going to go down. Multiples were so high before, because interest rates were as low as can be. Things are different now, and people can’t expect it to be like old times. Patience will be required, and they will have to get used to a high-rate world.”

“Healthcare is still very ripe for PE,” due to innovation and fragmentation, said Jeremy Knox, senior investment director, private equity, Schroders.

If you’re at the conference, shoot Aaron an email at aaron.w@peimedia.com
And check out Aaron’s latest healthcare story, an interview with GTCR’s Sean Cunningham about the firm’s new healthcare services platform, Avryo with long-time exec Kelly McCrann.

Q1 slowdown. EY’s quarterly Pulse report is out this morning with analysis of Q1, and the numbers reflect some slowdown in deal activity.

“In the first quarter this year, PE firms announced deals valued at US $221b, a decline of 27% from the first quarter of last year,” finds EY. “It’s worth noting however, that despite the deceleration, activity remains extremely robust – year-over-year comparisons are confounded by the fact that the first quarter of 2021 saw 719 deals announced valued at more than US $300b, making it the second-most active quarter on record. Indeed, given the breakneck pace at which deals were announced last year, it’s altogether unsurprising that the market is now witnessing some measure of slowing as participants digest the acquisitions made over the last year and a half.”

More from EY: “While deal activity currently remains robust, elevated levels of macro and geopolitical uncertainty have the potential to create headwinds for new transactions. At the portfolio level, increased commodities costs, supply chain disruptions, elevated labor expenses and increased costs of borrowing are all necessitating that PE firms to work closely with companies to understand and respond to a highly fluid and rapidly changing environment.”

Private credit. Earlier this morning, Monroe Capital announced the final close of its 2022 Monroe Capital Private Credit Fund IV with $4.8 billion of investable capital, including targeted fund leverage and separately managed accounts investing alongside the fund. It marks the Chicago firm’s largest fund to date, exceeding the previous fund, which closed at $2.3 billion in 2018. Backing lower middle-market US companies with less than $35 million in EBITDA, the fund has already invested over $1.7 billion in 90 transactions.

I reached out to Ted Koenig, chairman and CEO of Monroe, to ask why interest in direct lending is higher than ever right now, and here’s his reply:

“Private credit, proportionally, has been the fastest growing asset class among all alternative investments over the last decade. The reasons are simple. We have witnessed a very low traditional fixed income rate environment for longer than anyone thought was possible with no signs of abating — with ten-year Treasury rates in the sub 1-2% range. Institutional investors such as pension funds and insurance companies simply cannot pay their obligations and expenses to pensioners and policyholders without generating much higher levels of current income. Couple that with the unprecedented growth of PE funds and demand for financing to fund LBO transactions. This creates a perfect storm for private credit growth. We see this as a permanent secular trend, and we have prepared for it by building a variety of niche private credit strategies to be responsive to the complex financing needs of the PE industry.”

For more on private debt, see my recent Q&A with Randy Schwimmer, co-head of senior lending at Churchill Asset Management and founder and publisher of The Lead Left.
Inside the exit. Earlier this week, New York-based private equity firm Castle Harlan sold Tensar to publicly-traded Commercial Metals Company, a steel and metal maker in Irving, Texas, for $550 million. Tensar, headquartered in Alpharetta, Georgia, makes materials known as “geogrids,” which reinforce soil in foundations for a range of applications, including roads, airports and railroads. The company is benefiting from a renewed focus on infrastructure in the US and throughout the world. PE Hub’s Obey Martin Manayiti spoke with Castle Harlan senior managing director Marcel Fournier about the exit.

He said Castle Harlan transformed Tensar into a globally recognized company within the construction sector. “We supported a new internal structure,” he said. “We invested in R&D. We developed a whole new generation of products, which are now being introduced around the world. We entered new geographies, such as India and Vietnam; and we grew the volumes, the revenues and the profitability of the company.”

For more, read Obey’s story.

Feel free to reach out to Obey about PE deals in energy, infrastructure and supply chain. His email address is obey.m@peimedia.com.

You can reach me at mk.flynn@peimedia.com. And you can reach assistant reporter David Wansboro, who joined PE Hub this week to focus on PE deals in Europe, at david.wansboro@peimedia.com.

That’s it for now.

Until tomorrow,
MK