The State of the Debt Markets in Private Equity Transactions

Drinker Biddle hosted its 10th annual roundtable discussion of “The State of the Debt Markets in Private Equity Transactions,” on December 6, 2016. At the roundtable, nearly 50 representatives of private equity sponsors, senior lenders, mezzanine lenders, and investment bankers participated in a discussion with Drinker Biddle’s private equity and corporate finance lawyers.

This roundtable discussion was preceded by opening remarks from Peter Ammon, Chief Investment Officer for the University of Pennsylvania. Mr. Ammon opened with insight into how the University of Pennsylvania works to preserve and grow its endowment through, among other things, private equity investments. Mr. Ammon discussed trends in the market and the University of Pennsylvania’s reaction to those trends.

Following the introductory remarks, there was an open discussion among bankers, private equity sponsors and other guests. The discussion focused on both the current climate for deals and expectations for the future. Below are some highlights:

• The conversation began with a discussion of the expected effect of the new administration on the private equity market. While there was a consensus that the market can expect certain traditional Republican priorities such as lower taxes and less government regulation to play a role, a consistent theme among participants was the uncertainty about policy initiatives and how those policies will affect the private equity market. In particular, participants voiced questions about whether cross-border deals will be impacted by foreign policy decisions of the new administration.
• Participants discussed possible appointments under the new administration and changes in Congress, noting the prevailing expectation that the new regime would favor deregulation. There was speculation concerning the current leveraged lending guidelines, the Financial CHOICE Act, and the Consumer Financial Protection Bureau, and what to expect in relation to Dodd-Frank.
• The discussion turned to the state of the current private equity market. Participants generally agreed that the markets are liquid and access to both equity and debt capital has not been a particular challenge over the last year. Sponsors suggested that one of the challenges they have faced recently in the current seller’s market is identifying target companies with owners interested in selling that will produce the level of returns historically generated by private equity investments, particularly in the industrial manufacturing sector and the middle-market. Participants also discussed the desirability of having longer-term investments in their portfolios, but noted that developing fund vehicles that support longer-term horizons is a challenge for the industry.
• Participants discussed potential opportunities that may be afforded by the new administration. Optimism was expressed that lower taxes and less regulation would result in a climate of growth. Participants noted that industries where traditional republican values dovetail with the populist sentiment evidenced by the recent election may present interesting investment opportunities in the coming year.

We will continue to monitor trends and developments in this area. For more information on the matters discussed in this recap, please contact one of the heads of our Private Equity or Corporate Finance teams listed below, or your regular contact at Drinker Biddle.