As private credit cements its place at the center of modern dealmaking, sponsors and borrowers must rethink how they structure capital, manage timelines, and negotiate leverage in a reshaped lending landscape.
Over the past decade, various market forces have transformed private credit lenders and, equally as important, perception of these funds. Once thought of as “lenders of last resort,” private credit funds are now viewed as welcome capital partners providing borrowers with necessary acquisition and growth capital. Indeed, most forecasts show private credit funds continuing to gain market share in the capital formation sector. Evolution of the private credit industry has led to far greater competition with commercial and investment banks. This competition has upended traditional lending models and is also shaping the M&A and buy-out markets. This article explores this shifting landscape.
Private equity sponsors and middle market companies are increasingly turning to private credit from commercial and investment banks. Primary reasons are greater certainty, faster execution, and enhanced flexibility. Unlike traditional banks, private credit lenders typically have a more stream-lined credit approval and committee process. Borrowers speak directly with decision makers, rather than the bifurcated credit approval and relationship management functions employed by many commercial banks. And, of course, private credit lenders are not subject to the same regulatory oversight as commercial banks. Each of these factors helps private credit lenders provide borrower certainty. The increased competition among private credit lenders is also causing private credit lenders to adhere to term sheets and borrower/sponsor deal timelines. Borrowers feel more confident that private lenders will execute timely.
Relative lack of regulatory oversight also permits private credit lenders to provide more tailored structures, offer more aggressive and forgiving leverage and financial covenants and payment structures, including payment-in-kind (PIK) features. From the borrower’s perspective, private credit relationships often come with less frequent financial covenant testing, streamlined documentation, and a more pragmatic underwriting process—one that accounts for sponsor backing and pro forma performance. This is in stark contrast to traditional banks, where regulatory scrutiny, internal risk committees, and capital adequacy constraints limit their flexibility —especially in leveraged transactions. Each of these features have enabled sponsors to grow more dependent on private credit to execute acquisitions and growth strategies without the rigidity and syndication risk of traditional leveraged loans.
Historically, deals relied on a “bank club” or syndication model, where multiple lenders funded a senior secured facility with strict pro rata and sharing arrangements. Today, sponsors can close with a single private credit counterparty or a private credit syndicate (often with members frequently doing deals with one another) on a committed basis. These facilities typically provide additional flexibility and room to upsize post-closing for sponsors to grow a platform. This change accelerates deal timelines and reduces syndication risk, giving sponsors more leverage in competitive M&A processes.
Commercial banks – desperate to compete with their rebranded private capital counterparts – are trying to offer sponsors flexibility as well: delayed draw or revolving loans to fund earn-outs along with incremental facilities are frequently now part of bank credit offerings. Large commercial banks have also launched “private capital” or “proprietary” divisions looking to capitalize on the demand for private credit offerings. Ironically, as private credit firms fund ever larger deals, they have become more dependent on CLO and warehouse lending markets – often arranged by leading commercial and investment banks – which impose deal features on many private credit borrowers. Over time, reliance on the CLO market could ultimately curtail the “flexibility” that has become a hallmark of private credit offerings.
Of course, greater flexibility and certainty come at an economic cost to borrowers. Private credit pricing typically carries a premium of 100–300 basis points over traditional bank debt. Private lenders may also ask for equity co-investment rights, warrants, or tighter board oversight. Whereas, commercial banks can accept deposits to push down borrower debt costs and regulatory restrictions typically prohibit “equity kickers.”
Private credit firms are also competing in the critical ABL and stretch facility space. Private capital firms are often willing to underwrite collateral-light or IP-heavy businesses that commercial banks would traditionally eschew, using cash flow-based metrics and EBITDA adjustments more aggressively than regulated lenders. It was once difficult for private capital lenders to provide the type of quick access to revolving capital needed to compete in the ABL space, but changes in fund finance have led to enhanced competition. In the private capital ABL space it is not uncommon for lenders to impose longer notice periods for draws, however, again, borrowers are often willing to sacrifice for overall deal flexibility. Private credit lenders are also working closely with bank ABL providers to offer a “split collateral” structure with pre-agreed intercreditor terms: a term loan backed by cash flow and equity, alongside a revolver secured by traditional current assets.
As private lenders do not rely on deposit funding and typically hold credits rather than drive fees through syndication, they have become more reliant on building long-term relationships with sponsors. Once lenders of last resort, private capital lenders now hold themselves out as long-term capital partners that help drive success. This “patient capital” model allows for more relationship-driven underwriting and more responsive decision-making in workouts or amendments. Many private credit providers now maintain in-house operating partners or portfolio monitoring teams, taking a page from the sponsor playbook.
In distressed scenarios, private credit presents both challenges and advantages over traditional lenders. Private credit lenders are typically more aligned and consolidated, reducing the coordination issues that plague widely syndicated deals. Plus, they often have the governance rights and capital necessary to take the lead in a restructuring. The speed and flexibility may be detrimental to borrowers looking to take advantage of lenders who may not be aligned and who acquired loans for different costs. At the same time, it does offer borrowers the ability to work through forbearances, waivers, and access additional liquidity quickly. As the private credit market has evolved, private lenders see more value in working out a loan than employing “loan to own” strategies which can be far more operationally intensive and provide less certain capital returns.
The rise of private credit represents more than just a shift in funding sources—it’s a fundamental reordering of how capital is deployed and deals financed. Sponsors, borrowers, and banks all need to adjust to a world where flexibility, speed, and alignment often matter more than price. Perhaps more importantly, borrowers can benefit from the increased competition among private credit lenders and as between private credit firms and their commercial lending counterparts.
Keith Sambur is a partner with Holland & Knight in Denver and a co-leader of the firm’s Private Credit practice. Mr. Sambur primarily focuses on representing private equity sponsors, private credit funds, portfolio companies, hedge funds, asset managers, single-sponsors and alternative capital sources in complex financing leveraged lending transactions, including leveraged buyouts, private placements, high-yield and convertible debt offerings, recapitalizations, restructurings and other special situation transactions. He also has significant experience with preferred equity transactions and equity-kickers, including warrant consideration.
Sean Minorini is an associate in Holland & Knight’s Denver office. Mr. Minorini’s practice focuses on syndicated loan transactions, asset-based lending, and acquisition and leveraged finance for borrowers and lenders. He represents private equity firms and their portfolio companies, corporate borrowers and other financial institutions with leveraged finance transactions, asset-based financings, real estate financings, subordinated debt facilities, acquisition financings and other types of secured and unsecured credit facilities.