Recent news on Non-sponsored Lending trends

Adapting to Change: The Rise of Non-Sponsor-Backed Private Credit in a Shifting Market

In an article by Private Debt Investor, David Flannery, president of Vista Credit Partners, discusses why the golden era of private credit is far from over, despite the evolving market conditions. Over the past several years, private credit has gained significant momentum as companies look for alternative financing solutions amidst volatility in traditional credit markets. According to Flannery, while rising interest rates and economic headwinds have made it more difficult for businesses to secure traditional financing, private credit has proven to be an adaptable and attractive option.

Flannery highlights that historically the most lucrative opportunities in private credit have been in sponsor finance, where businesses seek bespoke solutions for growth, buyout, and acquisition capital. 

One area Flannery views as an opportunity is the funding of non-sponsor-backed businesses, which are increasingly turning to private credit financing options partly given the volatility in the growth equity market.  While some lenders avoid non-sponsored deals given the lack of a sponsor investing alongside, Vista has a substantial platform and years of operational expertise to evaluate and monitor risks.  Plus, non-sponsored deals are often structured with tighter maintenance covenants providing the credit investor added protections.  

According to Mergers&Acquisitions, most private credit firms have traditionally avoided the non-sponsor-backed sector, viewing it as riskier, more complex, and labor-intensive compared to lending to private equity (PE)-vetted companies. Around 70% of the $341 billion in U.S. dry powder is allocated to PE-backed deals. However, with too many firms and not enough demand in the PE-backed space, private credit firms are now exploring non-sponsor-backed companies, including those owned by founders, family offices, and publicly traded entities.

Wells Fargo and Centerbridge Partners helped lead this shift by launching a $5 billion fund, with half earmarked for non-sponsor-backed loans. Investors, such as the Abu Dhabi Investment Authority, have shown strong interest. Similarly, HPS Investment Partners closed a $10.4 billion fund focused on non-sponsor-heavy loans, with large commitments from pension funds seeking diversification and higher returns. Though non-sponsor lending presents challenges like origination, underwriting, and time commitment, firms like Carlyle and Turning Rock Capital see these barriers as opportunities for higher returns in a less competitive market.

As per Alternative Credit Investor, direct lenders are increasingly shifting their focus to non-sponsor-owned companies as competition intensifies in the sponsor-backed lending market. Christophe Rust, co-head of European credit opportunities at NinetyOne, shared that their private debt portfolio is entirely composed of non-sponsor firms, seeing this space as a relatively untapped opportunity. While sponsor-backed lending is often considered less risky, Rust emphasized that the key is picking the right credit, noting that many non-sponsored companies offer significant potential. However, he acknowledged that loan origination in the non-sponsor space is more challenging, requiring a strong network and comprehensive due diligence. Currently, about 70% of the $1.7 trillion private credit market consists of sponsor-owned borrowers, but some asset managers, like Rust, are working to shift that balance.

Other fund managers are also looking to differentiate themselves by exploring non-sponsor lending, though the challenges are clear. Bridgepoint’s Andrew Cleland-Bogle pointed out that 95% of his portfolio is sponsor-backed, but he recognizes opportunities in non-sponsor lending for businesses poised to enter the middle market. Blair Faulstich of Benefit Street Partners cautioned that sponsor-backed lending should not be viewed as a guaranteed risk mitigator, as sponsors do not always inject additional equity when companies underperform. Ultimately, Moody’s senior VP Jeanine Arnold stressed that risk assessment must be based on traditional credit analysis—focusing on debt affordability and cash flow—rather than simply whether a company is sponsor or non-sponsor owned.

In conclusion, private credit continues to demonstrate resilience and adaptability, even as market conditions evolve. While sponsor-backed lending remains dominant, the increasing shift towards non-sponsor-backed companies offers promising opportunities for those willing to navigate the complexities of this sector. As asset managers reconsider their strategies, the focus on thorough credit analysis and risk management will remain key in both sponsor and non-sponsor spaces.

Recent News, Deals, and More

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• Alaska Communications secured a $390 million credit facility to repay debt and expand its fiber infrastructure in Alaska.

If you’d like to discuss any private credit opportunities or deal situations, please reach me at tbarnes@axisgroupventures.com.

You can learn more about Axis Group Ventures at our website here. 

All the best - Tim