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Private Credit Snapshot: Is the Direct Lending Market Running Too Hot?
Joseph Taylor, CFA
Managing Director, Head of Capital Markets
Total sponsored middle-market loan volume soared to record highs in 2021, reaching $196 billion for the year, with growth driven by pent-up merger and acquisition (M&A) activity after a Covid-related cooldown in 2020. Of this total, direct lending volume contributed $131 billion – double 2020’s level. In the fourth quarter alone, direct lending volume hit US$55 billion, 60% above the prior high set just the quarter before (see chart).
While some pullback is likely in 2022, M&A-related loan volumes, including new leveraged buyouts (LBOs) and add-on deals, are expected to remain robust, though activity may be tempered by rising rates and geopolitical risks. Record levels of dry powder across private equity and private credit markets, combined with continued demand from companies seeking growth, generational wealth transfers, and professionalization, have all been factors contributing to this middle market activity, creating stiffer competition for quality assets. This increases the potential for spread compression and more aggressive financing terms (fewer covenants and lender protections, along with higher leverage), and in turn, higher potential risk.
Bottom line? While opportunities appear plentiful, this environment underscores the need for a selective, disciplined approach that puts safety first.
Sponsored Middle-Market Loan Volume Soared in 2021
Source: Refinitiv LPC as of 31 December 2021. The middle market is defined as issuers with revenues of US$500 million and below and a total loan package of US$500 million and below. The direct lending middle market is defined as non-syndicated facilities, no non-titled lender. Unitranche and bilateral loans, deals clubbed over US$150 million deal size, facilities that go unreported, privately placed second-liens, mezzanine and seller notes.
Disclosure
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