PE Hub’s Outlook 2022 Q&A series with high-profile private equity professionals continues today with insights from Trevor Clark, founder and managing partner of Twin Brook Capital Partners, the mid-market direct lending subsidiary of Angelo Gordon. We asked Clark for his thoughts on the latest trends in private equity-backed loans.
What’s changed or is new in the PE deal lending market over the last year or two?
The events of the last two years have produced a meaningful shift in lender selection criteria, as the outdated view that lender selection was an afterthought and didn’t have a material impact on PE returns has clearly proven to be false. The PE community has witnessed firsthand the importance of having experienced, scaled and relationship-focused lending groups, and this has resulted in meaningful market share gains for more established lenders.
Has the use of leverage by PE firms changed?
The use of leverage, for the most part, has not changed. As in the past, you will see leverage levels increasing as you move from lower to upper mid-market sized borrowers, as well as within some specific industries that have higher cash flow dynamics or higher purchase multiples. The biggest difference we have witnessed over the last year has been related to the leverage discount applied to industries that have experienced a longer and more pronounced impact from the pandemic.
How will rising interest rates affect mid-market loans?
Although rising interest rates have the obvious effect of driving up borrowing costs and reducing the relative attractiveness of debt financing, given where the cost of debt currently stands, we don’t expect near-term interest rate increases to have a meaningful impact on loan demand in 2022.
How are lenders differentiating themselves in these heady PE deal days?
Speed and reliability of execution have become increasingly important as investment banks have compressed the timing of sell-side processes. As has been the case over the last five years, hold size continues to be a key criterion lenders use to differentiate themselves among their peers.
What’s the biggest challenge in dealmaking today? What keeps you up at night?
Picking a “biggest challenge” is very relative, as today’s challenge may be tomorrow’s opportunity. That said, if I had to point to one topic we are currently focused on, it would be the combination of accelerated due diligence processes and transactions with long lists of requested EBITDA adjustments.
What are you most looking forward to in 2022?
It feels like the worlds of private equity and private debt are set up for another banner year in 2022. We look forward to continuing to see our market share grow in the private debt space and, hopefully, to a more normalized post-pandemic environment for everyone.