• PE borrowers benefit as interest rate margins hit new lows, advisors say
• Many will need to find junior capital solutions to refinance at affordable rates

Union Square Advisors’ largest-ever capital markets deal points to how growing competition between private credit and big banks provides new options for large borrowers, just in time for an expected wave of refinancings and recovery in M&A, leaders of the technology-focused advisory said.

December’s USD 460m debt refinancing for Permira portfolio company Synamedia was resurrected last year as a private credit transaction, after being shopped unsuccessfully in the broadly syndicated market in 2022, they explained.

The transaction illustrates a trend that investment bankers expect to see more of during the next 12 to 24 months, as a widely watched wave of refinancings becomes more acute, said Mike Meyer, partner and head of Capital Markets, who was appointed this month to the newly created role of CEO.

Borrowers are already benefiting as private funds step up with large credit facilities, only to have Tier 1 and Tier 2 banks swoop in and do broadly syndicated deals at much lower prices, he said.

“That tells you the banks are back; the banks are competing for this product,” Meyer said.

After a period of bank retrenchment, intensifying competition in the lucrative leveraged finance business is sending interest rate margins to new lows, Bloomberg reported last week.

In the Synamedia deal, Union Square advised on the refinancing of debt from the 2018 leveraged buyout that saw Permira acquire and rename Cisco’s Service Provider Video Software Solutions business, as reported.

In 2022, the deal was taken out to the broadly syndicated market by a major bank, before being pulled. Union Square pitched the Permira team on the idea of doing the deal with private credit, they said.

Ultimately, they assembled a USD 350m unit tranche led by Adams Street Partners, USD 60m in junior capital led by NorthWall and replaced an existing USD 50m revolver.

Soaring interest rates are putting pressure on an increasing number of companies with fixed charge coverage ratios under 1, that will not be able to service their debt with current earnings, they explained.

Many will turn to private credit but some will be unable to replicate their entire debt balances at affordable rates and thus will need to find additional junior capital solutions, the advisors said.

He offered the example of one client with USD 50m in preferred structured equity that must be refinanced. The preferred holder can flip the company board or force a sale if the shares aren’t redeemed at “one and a half times X,” Meyer explained.

“It’s not a mandatory redemption but it gets very ugly in 12 months,” he said.

“Some companies are scrambling,” he added.

Union Square remains primarily an M&A shop, however, and expectations are for increased activity in that side of the business as soon as this year. “We’re starting to see it; our pipeline is picking up nicely on the M&A side,” Meyer said.

Though the recovery in technology M&A is taking longer than expected, the end of rate hikes and improving credit markets should be tailwinds for leveraged buyouts in 2024, he said.

Deals like Vista Equity’s USD 16.5bn take-private of Citrix Systems have cleared syndicated markets, while problematic loans, like those stemming from Elon Musk’s USD 44bn purchase of Twitter, now X, have largely been written down by banks, Meyer said.

Sponsor M&A activity showed momentum into the end of the year, as the investment bank served as buy-side advisor to Carlyle [NASDAQ:CG] in its purchase of risk and compliance software firm Exiger, which closed in December.

Terms were not disclosed but Exiger CEO Brandon Daniels confirmed to this news service published reports of a USD 1.2bn valuation for the majority stake purchase, in which Insight Partners was also a participant.

“The bigger tech companies are starting to come back in the game and be aggressive again with buying companies,” said Wayne Kawarabayashi, COO and head of M&A.

The recovery in valuations since the low point in October of 2022 has reached a tipping point where sellers are returning to the market with more realistic expectations, he said.

A deal for a high-growth software company that might have fetched 10 times revenue in 2021, today might get a couple turns off of that; while a more modestly growing company that might have gotten mid- to high-single-digits, now is getting mid- to low-single-digits, Kawarabayashi said.

“We’re having a lot of conversations with companies that want to use the current environment because it’s much more improved than it was last year, to run a sell-side process,” he said.

Once the logjam breaks, Union Square Advisors anticipates strong interest in additional software services companies addressing enterprise risk, governance and compliance, Kawarabayashi said.

Also hot targets are companies involved in the digitization of industrial, manufacturing and construction spaces, replacing functions that previously used spreadsheets or were historically not tech-enabled, he said.

Other areas occupying the team’s time include software associated with global supply chain management, healthcare tech, pharma tech, optimization of patient care and customer journey tools, particularly the growing number of AI-enabled innovations, the M&A chief said.