Breakingviews: LBO shops offering credit get best of both worlds

Leveraged buyouts can’t live up to their name if they can’t find lenders. That’s becoming a growing threat as volatility in debt markets is causing deals to be repriced or cancelled. Enter Blackstone, Apollo Global Management and other private equity shops that have raised massive credit funds, allowing them to have their cake and eat it, too.

Private equity firms have more than $3.4 trillion of dry powder, according to Bain & Co., and they have been waiting for a moment like this to spend it. Equity prices have fallen since the beginning of the year, with the S&P 500 down 6% and the Nasdaq 100 off more than 11%. At the same time, the difficult regulatory environment has kept large corporate buyers on the sidelines.

But the credit markets have suddenly become less accommodating, partly because of rising geopolitical risks. In the past week, loans for SS&C Technologies’ $1.6 billion acquisition of Blue Prism have been pulled, according to Bloomberg. Others, like a bond deal for industrial firm SPX Flow, are being repriced to reflect investor concerns.

There are other worrisome issues that could turn cracks into craters. Market participants say investors in collateralized debt obligation funds, which make up a large part of the market, are readjusting risk appetites completely.

That leaves an opening for private equity firms to fill the gap. Unlike banks that syndicate debt to other investors, credit funds lend with the intention of holding it. They might commit a smaller portion of a deal overall, and the rates that they charge are a bit higher. It can also raise conflict of interest issues if they own both equity and debt.

But there is also more certainty they will complete a deal, and they have plenty of money to spend. Direct lending is a piece of some $240 billion that Blackstone has in its credit platform. This week, Apollo, Blackstone and other private funds committed to Thoma Bravo’s $10.7 billion deal to buy Anaplan.

The risk is that the private equity firms are taking yesterday’s deals at today’s price, and tomorrow could look much different. But more likely they are stepping into a market that has been upended by volatility that has made less nimble investors slightly more scared. For funds that have the resources, it’s a sweet spot moment.