Businesses Seek Private Credit Amid Tariff Instability

In light of ongoing tariff uncertainties and fluctuations in market conditions, numerous companies are increasingly opting for funding from private credit firms instead of traditional lending sources. This shift has been particularly pronounced since early April, when inconsistent tariff policies contributed to significant market volatility.

Industry analysts and financial experts have noted that the private credit sector, valued at approximately $2 trillion and having expanded from just $500 million a decade ago, has become a more attractive option during tumultuous economic times. According to Mike Koester, a co-founder of 5C Investment Partners, banks face challenges in placing new deals into the syndicated loan market during periods of volatility, making private credit a more appealing alternative as these firms already possess the necessary capital to lend directly.

Recent transactions illustrate this trend. Lakeview Farms, for instance, opted for a loan from Silver Point Capital to finance its $200 million acquisition of Noosa, a yogurt manufacturer. This decision was influenced by the more adaptable financing options available through private credit as opposed to the traditional syndicated loan process, which was initially led by Citigroup.

In another notable case, Blackstone and Apollo Global Management collaborated to secure approximately $4 billion in private credit financing for Thoma Bravo's acquisition of Boeing's Jeppesen navigation unit. The current landscape of private credit is characterized by heightened competition, as noted by Ted Swimmer, head of capital markets and advisory at Citizens Financial. He mentioned that his firm lost several deals to private credit bids due to their inability to competitively price syndicated loans amidst market fluctuations.

Data from Dealogic indicates that the number of syndicated loans in the United States dropped by 15% from January to May 21 compared to the same timeframe the previous year, as volatility in financial markets has dampened public market activity. In contrast, direct lending transactions, which compete directly with syndicated loans and typically involve a limited number of private credit funds, experienced a smaller decline of 10% in the first quarter year-over-year, according to PitchBook's Leveraged Commentary & Data. Interestingly, there has been a noticeable increase in direct lending credit deals during April and May.

While private credit may come at a higher cost than traditional lending, it offers greater flexibility in structuring transactions. This flexibility can manifest in various forms, including customizable loan terms, repayment schedules, and collateral requirements, setting it apart from the more standardized underwriting processes typical of banks.

The Lakeview deal, announced in early April, occurred during a period when credit spreads for borrowers widened significantly following President Donald Trump's extensive tariff announcements. The prevailing sentiment among private credit strategists is that volatility typically does not favor public financing markets but instead enhances the appeal of private markets, which can provide a more reliable long-term perspective.

The expansion of private credit can be attributed, in part, to stricter regulations implemented after the financial crisis of 2007-2009, which increased the cost for banks to finance high-risk loans to financially troubled companies. Nonbank entities such as private equity firms and asset managers are often viewed as more viable financing options compared to traditional banks due to their capability to offer more flexible terms and leverage.

As more borrowers turn to private credit, the relative certainty it provides in uncertain market conditions is becoming increasingly valuable. Furthermore, large Wall Street banks, including JPMorgan Chase, Morgan Stanley, and Goldman Sachs, have allocated substantial resources for direct lending and have been involved in some of these private credit transactions. However, these institutions have opted not to comment publicly on their involvement.

Market analysts predict that private credit will continue to gain market share as volatility persists, highlighting the agility and responsiveness of private lenders in adapting to changing economic landscapes.