High interest rates and uncertain market conditions slowed M&A activity among private equity firms in 2023. However, 2024 has seen a resurgence in leveraged buyout (LBO) activity, with many of the largest deals opting for leveraged loans over direct lending for financing.

Leveraged loan volumes have rebounded significantly in 2024, closely mirroring the increase in LBO activity. In the first quarter, syndicated banks recorded USD 22.65bn in leveraged loan volume, the highest in six quarters following a peak of USD 29.67bn in the third quarter of 2022. Similarly, new platform M&A surged in 1Q24, with LBO volume reaching USD 36.55bn, the highest since the third quarter of 2022, when LBO volumes hit USD 41.84bn.

Along with LBO and leveraged loan volumes returning in 2024, LBOs backed by leveraged loans are taking back market share from direct lenders. These nonbank lenders picked up deals in 2022 and 2023 while the leveraged loan market limited activity during the uncertain macroeconomic period.

Leveraged loan volumes rose 76% during the first two quarters of 2024 to USD 41.38bn from the first half of 2023, which recorded volumes of USD 23.45bn. The recovery in volumes during the first half of this year was driven by three of the largest deals recorded in 2024 thus far. In May, Stone Point, Clayton Dubilier & Rice, and Mubadala acquired Truist Insurance for USD 12.3bn. KKR agreed to acquire a stake in Veritas-backed Cotiviti in a USD 10bn recapitalization deal the same month, and in May, Roark Capital bought Subway for USD 9.6bn.

Leveraged loans which accounted for just 46% of the USD 50.73bn in LBO debt financing volumes for the first half of 2023 also took back market share in 2024. Leveraged loan market share increased to 68%, speaking for USD 41.38bn of the USD 69.17bn total LBO debt financing volume in the first half of this year.

On the flip side, the reopening of the leveraged loan market has led to direct lenders losing many of the largest LBO deals to its banking competitors. Direct lenders, which accounted for almost 70% of LBO debt financing volume in the fourth quarter of 2023, saw market share fall to 28% and 36% for the first quarter of 2024 and second quarter of 2024, respectively.

Even the larger direct lending deals backing LBOs in 2024 have been dwarfed by the giant deals taken down by the leveraged loan market. Bain Capital tapped direct lenders to acquire PowerSchool Holdings for USD 5.6bn in June. In May, a direct lending club provided USD 2.6bn in debt to back Permira’s USD 6.9bn take-private of Squarespace. In June, Advent International and Leonard Green & Partners agreed to take a stake in Genstar Capital-backed Prometheus. Direct lender Oak Hill Advisors led the USD 1.4bn debt package backing the stake acquisition.

Direct lending market share falls but deal count stays steady

While direct lending dollars now account for a smaller portion of debt financing backing leveraged buyouts, direct lenders continue to finance most LBOs in terms of deal count. Direct lenders financed 113 LBO deals in the first half of 2024 compared to the syndicated banks, which executed 33 deals during the same period. This is likely because direct lenders still pick up much of the lower middle market and core middle market financing deals even as the largest LBOs in the market are turning to lower cost leveraged loans.

Most of the direct lending deals that fund LBOs in 2024 happened in the first two quarters where direct lenders outpaced loan and bond deals by more than 50%. On the other hand, there has been a slight uptick in leveraged loan deals in 3Q24 and number of deals which involve direct lending seems to be slowing down.

Use of Proceeds

In the first three quarters of 2023, LBOs dominated direct lending activity, far surpassing refinancing and general corporate funding. However, since then, this trend has shifted, with direct lenders increasingly focusing on refinancing and corporate purposes rather than new platform LBOs. This decline in LBO financing as a proportion of total volume aligns with rising lender competition amid a slowly recovering M&A market.