Initially sideswiped by COVID-19 in early 2020, private credit markets began to bounce back by year’s end, leaving dealmakers optimistic that private credit might fully rebound in 2021. According to a new survey of 112 private credit industry professionals conducted by Katten in February, 91% of investors and 80% of lenders expect deal flow to increase this year and are optimistic about several deal categories and sectors.

For the report, Katten surveyed a mix of lenders and private equity investors. Those surveyed represent a variety of sectors, including financial services, information technology, consumer staples, communications, industrials and healthcare. Respondents provided their outlooks on deal flow, readiness to address the London Inter-Bank Offered Rate (LIBOR) phaseout and other issues critical to the private credit industry.

While the appetite for private credit deals in the second half of 2020 led to greater flexibility in deal terms and loan documents, questions remain as to whether that spirit of cooperation will continue. According to the survey, 55% of lenders said there will be pressure from their side of the bargaining table to pull back on “sponsor-friendly” deal terms in 2021. Meanwhile, 50% of private equity investors, who sponsor those deals, said their teams will be even more aggressive in negotiating terms.

LIBOR’s phaseout is a big disruption on the horizon, with a majority of respondents admitting they are not very prepared. The recent extension of the deadline to 2023 has given organizations more time, but respondents will not be able to stall forever.

“As it relates to LIBOR’s phaseout, we can expect the biggest banks and the largest institutions to move on this the fastest,” Michael Jacobson, partner and chair of Katten’s private credit department, said. “But there are some real fears out there for moving first. You certainly wouldn’t want to hardwire something into loan documentation that turns out to be anything [other] than the market approach.”

Key Report Findings

  • When it comes to deal flow, 19% of private equity investors and 21% of lenders expect deal flow will increase significantly (by more than 30%).
  • Nearly two-thirds of private equity investors (65%) and a plurality of lenders (41%) said loan documents in early 2021 have been more flexible than they were before the pandemic, while just 18% of the combined group said the documents were less flexible.
  • While most lenders expect their side of the table to put more pressure on negotiations to lessen sponsor-friendly deal terms, just 37% of investors expect that change. Similarly, 50% of private equity investors expect to be more aggressive in negotiating terms, an opinion held by just 29% of lenders.
  • Private equity investors and lenders were somewhat aligned when it comes to potential growth sectors, with a focus on financial services and information technology. But lenders also were excited about communications services and healthcare, with twice as much bullishness on the latter sector compared with private equity investors.
  • At the time of the survey, fewer than half of survey respondents (40%) said they were very prepared to address the LIBOR phaseout.