Preferred Equity: Recent Trends and Transactions
Pitchbook recently reported that the popularity of preferred equity transactions is growing in the current market, particularly in private credit and syndicated loan deals. Preferred equity enables companies to secure capital without imposing cash-pay interest obligations, while investors, frequently private credit lenders, enjoy appealing yields. While it offers flexibility in both capital structure and payout arrangements, its relatively high cost renders it not suitable for all companies. Nonetheless, preferred equity transactions are increasingly prevalent, offering innovative financing options across diverse industries. The report has many interesting insights so take a look.
In the Pitchbook report, a few recent preferred deals were highlighted. Riddell completed a $400 million dividend recapitalization, which involved a $125 million convertible preferred equity investment with a small coupon, supported by BC Partners. Blue Owl Capital announced its acquisition of Kuvare Asset Management for $750 million, accompanied by a $250 million preferred equity investment to aid Kuvare's subsidiary insurance companies. Buyers Edge received a substantial $425 million preferred equity investment led by General Atlantic's credit fund, allowing the CEO to increase the majority stake and providing an opportunity for a former minority investor to exit.
Here are a few additional trends in private credit.
Other trends....
- S&P Global's recent report highlighted that in the first quarter, companies borrowed $2.06 trillion, a 3% increase from the beginning of 2024, to refinance their existing debts. Although overall debt due in the next year is rising, the pace of increase may be slowing, particularly for riskier debts like speculative-grade and 'B-' and lower debts. Global debt levels are still climbing, reaching $23.7 trillion by April 1, 2024, a 0.9% increase from the beginning of the year. Both investment- and speculative-grade debts rose in the first quarter, marking the first increase in speculative-grade debt in nearly two years. The new borrowing helped offset defaulted debt during the quarter.
- Moody’s Ratings adjusted its outlook for direct lending funds managed by BlackRock Inc., KKR & Co., FS Investments, and Oaktree Capital Management, shifting it from stable to negative. These funds, collectively holding over $20 billion in assets, have experienced an increase in non-accrual loans, indicating potential losses on investments. The rise in non-accrual loans is attributed to factors like rising interest rates, affecting highly leveraged borrowers in private equity-owned companies. Successfully managing non-accruals and avoiding credit losses is vital for the success of private credit investments.
Recent Developments
- Bloomberg reports that Goldman Sachs Group Inc. has reportedly engaged in discussions with private credit lenders to bolster Beyond Meat Inc.’s liquidity. Goldman is looking for commitments of approximately $250 million in senior secured debt for general corporate purposes and potentially for repurchasing some of Beyond Meat’s convertible bonds at a discounted rate. Beyond Meat’s shares have experienced a significant decline since its IPO in 2019, and its convertible bonds are trading at distressed levels.
- The Net-Zero Asset Owner Alliance, comprising leading asset owners dedicated to sustainable investing, announced new guidelines for private assets and intentions to evaluate emissions associated with sovereign debt holdings. With pension funds and insurers managing a total of $9.5 trillion in assets, the Alliance aims to cut emissions by half by 2030 and achieve net-zero emissions by mid-century. Members will now integrate private debt and equity into emissions reduction plans to enhance oversight of high-emission companies.
- Acre Impact Capital has successfully concluded the initial phase of its Export Finance Fund I, supported by a diverse range of investors including institutional investors, family offices, and impact-first investors, securing $100 million in commitments. Its target is $300 million. The fund aims to provide long-term debt financing for climate-aligned infrastructure projects in Africa. Acre Impact Capital focuses on projects in renewable power, health, food and water scarcity, sustainable cities, and green transportation, prioritizing environmental and social impact.
- Toronto-based Brookfield Asset Management is reportedly in advanced discussions to acquire a majority stake in Castlelake, a specialized private credit investor. The proposed deal would involve Brookfield investing over $1.5 billion to gain a controlling interest in Castlelake and to make substantial investments in its funds. Castlelake, headquartered in Minneapolis, manages assets worth around $22 billion, focusing on real assets, specialty finance, and aircraft leasing, including financing for major airlines such as United Airlines. Should the deal proceed, Castlelake would become part of Brookfield's recently established credit unit, alongside Oaktree Capital Management.
What else are you tracking?
My firm is active in global debt placement and private market secondaries.
Touch base to discuss deals and market opportunities.
tbarnes@axisgroupventures.com
