Lending to deals like Thoma Bravo’s $11 bln purchase of Anaplan – which has no operating cash flow – is toxic for big banks. But private credit funds are signing up, writes JMAGuilford:
. These firms are playing aggressively to upend traditional lenders. It sounds like a technology start-up model mixed with a venture capitalist’s spirit – with the risk that entails.
Direct lenders started to build their coffers several years ago, opportunistically, when banks were tied up working through bad loans from the financial crisis. They raised loads of cash and now have huge war chests. Apollo has some $350 billion in its credit business, a portion of which goes to such lending.
Big banks have always had a fairly conservative way of financing leveraged buyouts. They hand over cash based on a multiple of EBITDA. The higher the multiple, the riskier the deal. The trouble is that Anaplan has a history of booking operating losses. Despite this, private equity wants to buy it anyway.A lot of public companies like Anaplan are seeing their valuations nosedive amid recent stock market turmoil, opening an opportunity for more of them to be taken private.
That sounds an awful lot like what start-ups do when they are trying to disrupt a market. And like a venture capital firm, the lenders will have a portfolio of deals, so if one goes sideways, solid returns on others can make up for it. The trouble is that venture capitalists take risky bets on equity, and when equity investments do well, they have much higher pay-offs. Debt returns aren’t as volatile, which is one reason banks are more conservative. But lending based on revenue growth rather than profit carries risks. And as time goes on, buyers looking for ever more acquisition targets might have to hunt even riskier, lower-quality companies.
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