In my engagements as an Interim CFO, I communicate with both Private Equity Groups (PEG) and Private Credit (PC) Lenders. After a deal ends, clients keep in touch to keep a pulse on deal flows, in addition to understanding which industries are experiencing stress before the news hits the front page of the Wall Street Journal.

This article in The Middle Market highlights the key subject currently for all PEGs – pressure from Limited Partners (LPs) to return capital. This is a fact regardless of a PEG’s Assets Under Management (AUM). Due to limited monetization over the past 4 years, PEGs are feeling pressure to put capital back into LP’s hands before going to market for the next fund as their clients only have so much capital they can allocate to the space.

The challenge is the “B-assets” discussed in the article will not generate enough capital to lock in the Multiple of Invested Capital (MOIC) investors are looking for, as monetized MOIC drives capital and makes raising the next fund easier.

Key Takeaways:

1. PEGs are looking to monetize assets but are trying to decide when to monetize each of their portfolio companies.
2. PC lenders will be highly active during this upcoming sale/refinancing wave (“Golden Age of Private Credit”).
3. Riveron’s Transaction Advisory team has already started to see a pickup due to the credit markets loosening up. 

Investors are saying deal activity will pick up, eventually. But when that happens, don’t expect the winners to come out of the gate right away, as sponsors are desperate to return liquidity to their LPs, while waiting to get top value for their most prized assets. “Most of what I think will come out from a lot of sponsors in the next three to nine months are what I call the B-assets,” says Oaktree Capital Managing Director Matt Wilson. “These are not top-tier portfolio companies, but assets that need to be sold to extract whatever returns sponsors can get so they can return capital and raise the next fund. These are probably the most price sensitive assets to interest rates, hence the reason they haven’t had a bid over the last 18-24 months.

https://www.themiddlemarket.com/news-analysis/expect-b-assets-come-to-market-first-as-dealflow-waits-to-pick-up