Watch CVC’s exit from US direct lending business for market smoothness
CVC Capital The announcement of its intention to leave its US branch of direct lending in the middle market is a bit surprising. The agreement provides for nine CVC investment managers to manage $ 1 billion in primarily unitranche and senior loans. Sound Point capital management. Private equity has beefed up alternative asset management products to diversify away from buyouts, which made me wonder why CVC would want to go lighter?
For its part, CVC claims that the asset sale not part of a broader withdrawal from direct lending. The company retains its European direct lending platform, where the concentrated, European-based private equity fund sees the most synergies with its buyout strategies. CVC also notes that most of its credit portfolio, productive credit, was not affected by the transaction.
Still, the deal may raise an eyebrow given its content. Private equity has invested in direct loans to middle market companies, creating business development companies and credit funds to capitalize on a $ 1,000 billion market, according to Preqin. And CVC’s loan portfolio would appear to be diversified across several sectors positioned for a post-pandemic rebound, including business services, hospitality, industry and healthcare.
The larger funds appeared to withdraw from direct lending and re-enter the market in a different structure. black stone, for example, ended its joint venture with Franklin Square in 2018 and sold its remaining lending business to KKR, only to raise $ 28 billion to create its own direct loan operation from which it retains all the profits.
Blackstone’s composite private credit funds returned Net 6 percent in 1Q21, and 7 percent from the start to the end of March. This could be another reason for CVC’s about-face on the attractiveness of US direct loans. The net returns are not insignificant, but are far from the performance of comparable strategies over the past year.
CVC itself has developed its investment activities in credit by to acquire Resource capital ‘s private credit group, Northport Capital TRS in 2016.
Monitor the performance of US mid-market direct lending in the upcoming earnings season to see if private equity firms’ internal lending branches may be ready to sell.
To learn more about our coverage, click here: Sound Point acquires CVC Direct Lending Credit Unit.