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Special Edition: Pluralsight’s Crucible—Private Lenders Take Charge in Major Restructuring
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Welcome back. Today, we’re diving into the tough side of private lending. For a while now, folks have been debating how well companies borrowing from direct lenders would handle restructuring. Are the borrowers better off? What about the lenders and shareholders? Well, the moment of truth has arrived.
Vista Equity Partners, owner of Pluralsight, an education-tech company struggling with liquidity since the pandemic, is about to hand control over to a group of private lenders, according to people familiar with the matter. This is one of the first major restructurings of nonbank debt and highlights a growing trend of restructuring outside the costly and time-consuming Chapter 11 bankruptcy process.
Lenders like Blue Owl Capital, Ares Management and BlackRock have agreed to swap the majority of their $1.7 billion debt for full ownership of Pluralsight, say the people familiar with the matter. Other lenders participating in the deal include Goldman Sachs Asset Management, Golub Capital, Oaktree Capital Management, Benefit Street Partners, and Guggenheim Partners.
Examining the details of this deal could shed light on what to expect as defaults in private loans start to pick up.
Keep reading the Pluralsight story here. More news below about interval fund fees, SRT, Ares's enormous fundraising effort, and insights from Cahill's Williams on evolving terms and risks in large private deals. Happy reading!
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Question For Readers: How do you think the Pluralsight restructuring will affect the future of private lending and debt restructuring outside of Chapter 11? Are you optimistic or concerned about this trend?
Reply to jodi.klein@wsj.com or to this newsletter. Please include your full name and location. We might include some responses in the next newsletter.
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We asked: What should borrowers and investors consider to mitigate risks arising from larger private debt deals?
Peter G. Williams, co-head of private credit practice at Cahill Gordon & Reindel: Private credit deals are becoming more similar to broadly syndicated loans, particularly for the upper middle market, as banks and direct lenders vie for the same deals.
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Though private credit terms are still materially tighter than syndicated loans, private credit lenders in the upper market must offer “covenant-lite” structures to compete with the broadly syndicated loan market. “Covenant-lite” has been a staple of the broadly syndicated market for years and direct lenders have acquiesced to this structure in order to win attractive deals. Pricing for private credit has decreased to around SOFR+4.75% (and sometimes tighter) for top-tier deals.
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"It’s important to understand the size and scale of the lender within the broader private credit ecosystem and how that lender influences outcomes for any troubled credits."
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— Peter G. Williams, Cahill Gordon & Reindel
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Counterintuitively, the convergence between private credit and bank syndicated loans is not necessarily a negative as it is a result of private credit financing larger and better credits. These larger companies tend to have better underlying credit metrics and these larger companies generally have more levers to pull in the face of tough operating environments.
Larger private credit transactions are naturally dominated by the major players that can provide meaningful sums of capital. Undersized names in the upper middle market may struggle as small lenders are generally along for the ride without a seat at the table or ability to effect an outcome in a downturn. Thus, for investors looking to commit capital to direct lenders focusing on the upper middle market, it’s important to understand the size and scale of the lender within the broader private credit ecosystem and how that lender influences outcomes for any troubled credits.
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ALEX NABAUM
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The Fees on Interval Funds
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Investors will believe almost anything, writes WSJ columnist Jason Zweig. He continues: To see what I mean, look no further than interval funds, one of Wall Street’s most popular recent trends. These funds don’t provide daily liquidity. Instead, they let you take out only a small portion of your money at periodic intervals.
Why would anyone want that? The marketing pitch is that if you want to own assets that seldom trade, it’s better to hold them in a fund that investors can seldom sell. That way, fainthearted strangers alongside you in the fund can’t sell in a panic. Limiting everyone’s ability to bail out reduces the odds that the manager will be forced to dump illiquid assets into a market downturn.
That’s why interval funds usually restrict redemptions, or the ability to sell shares back to the sponsor, to about 5% of total assets per quarter.
A key detail that’s omitted from the pitch: Some of these funds are also designed to harvest fees that mutual funds and exchange-traded funds don’t have the chutzpah to charge.
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Ally gets to make itself look less leveraged even while issuing more debt. PHOTO: TIFFANY HAGLER-GEARD/BLOOMBERG NEWS
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Lenders Tout a New Way to Transfer Risk, but Why Bother?
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Ally Financial has joined the ranks of banks doing deals known as synthetic credit-risk transfers, writes WSJ’s Jonathan Weil. These deals—for a price—might make lenders look less risky for certain purposes. They don’t transfer any loans off their books.
Behold the wonder of structured finance. Companies simultaneously can accomplish different objectives that one might think should be mutually exclusive. In this case, Ally gets to make itself look less leveraged even while issuing more debt—a neat trick.
Here is how it works: In its second-quarter earnings presentation last week, Ally said it recently issued $330 million of a type of debt that comes with an unusual twist. The amount Ally pays back will depend on the performance of a $3 billion pool of auto loans to customers with high credit scores. If the loans perform as well as expected, Ally will repay the principal in full, with interest. If the losses are worse than expected, Ally won’t have to pay back the full amount. Or at least that is the plan. In other words, the amount Ally pays back is linked to the size of the credit losses on the loans. Hence the name: credit-linked notes.
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$34 Billion
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The amount Ares Management has raised in its largest direct lending fund, with $15.3 billion in commitments, exceeding its $10 billion target. Combined with commitments to related vehicles and leverage, the capital base is expected to be around $33.6 billion.
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Ares Management raised $34 billion for its latest private-credit fund. The fund, focusing on senior direct lending, is nearly double the size of its 2021 predecessor fund that had $14.9 billion in total debt and equity commitments, said Jana Markowicz, partner and chief operating officer for U.S. direct lending in the Ares Credit Group.
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The latest fund has been actively investing since the third quarter of 2023, Markowicz said. Ares has committed $9 billion of capital from its new fund to more than 165 companies to date, she added.
Ares’s credit funds typically provide directly originated senior secured loans to middle-market companies in North America. The asset manager has deployed the same strategy as its predecessor funds, with investments in companies ranging from $10 million to more than $150 million of earnings before interest, taxes, depreciation and amortization.
The asset manager’s recent deal activity includes investments to software provider Aptean, a TA Associates portfolio company. It also was part of the group of creditors providing a senior secured credit facility to Equinox, a health and fitness club operator.
The fund attracted new and existing investors including public pension funds, insurance companies, sovereign-wealth funds, investment managers and family offices, Markowicz said.
––Isaac Taylor
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Financial services firm Cantor Fitzgerald in New York said it is setting up an arm to provide credit tied to bitcoin digital assets. The financing vehicle will start with $2 billion.
D2 Asset Management announces launch of investment firm with more than $1 billion in assets under management, specializing in credit, hybrid and special situation investments. The fund will invest in real assets, specialty finance and structured credit.
Monroe Capital has closed Monroe Capital MML CLO XVI with $561.8 million, making it the firm’s fourth collateralized loan obligation to close since 2022. The latest CLO is secured by middle market senior secured debt.
Sumitomo Mitsui Financial Group has set up a Europe-focused private credit fund with €450 million in investable capital, according to an emailed news release. The company said the new vehicle is part of a broader expansion outside Japan.
Asset manager NewSpring Capital in Radnor, Pa., said it has closed on $390 million for NewSpring Mezzanine Capital V under its private-credit strategy. The firm said the fund is operated as a small business investment company, or SBIC, under a U.S. Small Business Administration program to support smaller companies. NewSpring said it has committed about $273 million from the new fund to 19 recipient businesses so far.
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A New York City Pension Makes Renters’ Rights an Investment Priority
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Some LPs are starting to make changes in how businesses are run through their GPs. A New York pension fund adopted new standards aimed at forcing the landlords they invest in to limit rent increases and provide 30 days’ notice for eviction filings. The city’s four other pensions could follow.
New York City Comptroller Brad Lander, who is in charge of the city’s public pensions, said he started hearing from tenants a few years ago in his previous role as a city council member. People in his district were facing steep rent increases after their buildings were acquired by an investor. He learned that the Texas Permanent School Fund, a sovereign-wealth fund that supports education in its home state, had money in Brooklyn rental properties by way of its private-equity investments. The idea of a Texas fund affecting housing in New York didn’t sit well.
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Private credit holdings of insurers rose 5.7% last year to nearly $1.7 trillion, slowing from a 10% average growth rate from 2019 to 2022, industry credit-rating company A.M. Best reports, citing collateralized loan obligations as one of the drivers of last year’s expansion. A.M. Best said that as traditional lenders pulled back in recent years, private equity and other alternative asset managers have stepped in to supply credit to borrowers typically in the middle-market segment. At the same time, insurers have increasingly outsourced asset management to fund managers, rising to 41% of industry participants engaging in such activities last year.
Market index company MSCI said it has set up 130 private-markets barometers as MSCI Private Capital Indexes. The gauges draw on funds with more than $11 trillion in capitalization and include private equity, credit, real estate, infrastructure and natural resources. The firm already has established real-asset and property indexes.
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A person looks at ed-tech company Byju’s app in 2019. PHOTO: MANJUNATH KIRAN/AGENCE FRANCE-PRESSE/GETTY IMAGES
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Lenders in Byju's Seek Trustee in Involuntary Bankruptcy
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HPS Investment Partners and Silver Point Capital, lenders to Indian education-technology company Byju’s, want a chapter 11 trustee to be named to oversee the children’s educational businesses to preserve their value, according to a filing unsealed Tuesday in the U.S. Bankruptcy Court in Wilmington, Del.
In June, HPS, Silver Point and other lenders took the rare step of petitioning to put Epic Creations and two other affiliated businesses into bankruptcy, alleging that funds have been siphoned out of the units. Businesses in chapter 11 typically retain control of their assets and financial affairs while restructuring. The lenders said they are not receiving the weekly financial disclosures that are due and insisted that an outside trustee is needed to run the businesses. They have expressed willingness to provide financing but asserted that “without immediate intervention from this court and the appointment of a trustee,” restructuring won’t be possible. A representative for the businesses had no immediate comment.
— Becky Yerak
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In Other Deal News:
Savant Growth and VantagePoint Capital Partners led a $140 million debt and equity investment in call-center automation company IntelePeer Cloud Communications, joined by Savant co-investors and credit provider Vector Capital. The Dania Beach, Fla.-based company is developing systems using generative artificial intelligence.
Comvest Partners said its credit unit is providing $153 million to Pro Food Solutions to back a dividend recapitalization as well as expansion of the business, which supplies U.S. military markets. Comvest Credit Partners acted as the agent and sole lender to the Richmond, Calif.-based distributor.
CoVenture Management in New York is setting up a $50 million debt facility for credit-card debt refinancing company Digitt, for its services offered in Mexico. The financial-technology startup mainly serves low-risk customers who often face what it termed predatory rates from card lenders. The deal is CoVenture’s first in Latin America.
HPS Investment Partners and Sumitomo Mitsui Trust Bank are backing alternative asset investment technology and services provider S64 Ventures with a growth investment. The London-based company works with assets managers to provide investment access in Asia and European markets.
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Credit-focused Trinity Capital in Phoenix said it is partnering with Eagle Point Credit Management in Greenwich, Conn., to set up what it expects will become a business development company with initial capital of $60 million. Eagle Point specializes in income-generating investments such as collateralized loan obligations, or CLOs, portfolio debt securities and regulatory capital relief deals.
Oak Hill Advisors, a credit-focused alternative asset manager, and One Investment Management, a global alternative investment manager, announced a partnership to invest in European private credit. The new venture has initially up to $5 billion of investable capital which will help address the needs of European borrowers.
TPG Angelo Gordon has announced its exclusive financing partnership with Andover Storage Lending, a new platform for non-recourse financing of self-storage sponsors, expanding their relationship with Andover Properties.
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GoldenTree Asset Management in New York said it has hired Sam Friedland as head of real estate credit origination, a new role at the firm. He joins from Related Fund Management.
Churchill Asset Management, the credit provider owned by asset manager Nuveen, said it has added Robert Paun as a managing director and head of investor relations, retail & wealth. He was most recently in a similar role with FS Investments.
Proskauer hired Philip Bowden and Megan Lawrence to its Global Finance Practice, both based in London. Bowden joins Proskauer as co-head of the Global Finance practice. He formerly served as co-head of Global Banking at A&O Shearman. Lawrence joins with experience advising banks and private credit funds on leveraged finance transactions including broadly syndicated senior TLB financings, second lien financings and unitranche financings.
Hamilton Lane in Conshohocken, Pa., said it has hired Eric Solfisburg as an insurance strategist with its direct credit team as part of an effort to set up a unit designed to serve insurers. The effort also brought Kyle Ross on board as part of the insurance client solutions team. Hamilton Lane also tapped John Brecker to lead the new team as head of insurance solutions
Credit-focused Trinity Capital in Phoenix said it has hired Josh Ruben as managing director of life sciences. He was most recently with RBC Capital Markets.
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Ukraine Strikes Deal With Private Creditors for $20 Billion Debt Restructuring
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Ukraine struck a deal with creditors that could save it more than $11 billion over the next three years, a boost for the war-torn country as it struggles to keep funding the war with Russia.
The preliminary deal, unveiled last month, came after months of negotiations with a committee representing Western bondholders such as BlackRock and Pimco. The creditors had initially balked over how much relief Ukraine and its Western backers were requesting on nearly $20 billion of international debt run up before the Russian invasion, plus billions more in interest bills.
The rocky path to an agreement showed how the financial industry’s support for Ukraine, unequivocal just after war broke out, had since shifted toward a more pragmatic stance.
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A North Carolina judge denied Barings' motion to sanction Corinthia Global Management for hiring another Barings employee, rejecting Barings' contempt claim over an agreement following a mass departure of 22 staff members. (Private Debt Investor)
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JPMorgan’s new investment bank co-heads aim to win more market share by handling more corporate cash flows around the globe. It’s a service that can open doors to more lucrative lending, trading and investment banking business, posing a direct challenge to HSBC and Citigroup. In their first joint interview, Jenn Piepszak and Troy Rohrbaugh said they’re also forging ahead in private credit and deploying AI. (Bloomberg)
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A top global financial watchdog says the “shadow banking” sector needs more regulation. Writing July 22 to a group of finance ministers and central bank governors, Financial Stability Board (FSB) Chair Klaas Knot said recent “incidents of market stress and liquidity strains” have shown that non-bank financial institutions (NBFIs) can cause or worsen systemic risks to the larger financial system.
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This is a bi-weekly special edition newsletter with exlusive analysis on private credit, brought to you by Jodi Xu Klein, with help from Andrew Scurria, Isaac Taylor, Alice Uribe and Matt Wirz. Send tips and thoughts to jodi.klein@wsj.com or @jodixu on X. You can also reply to the newsletter. Sign up for alerts here.
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