Drinker Biddle recently hosted its 11th annual roundtable discussion of “The State of the Debt Markets in Private Equity Transactions” at Merion Golf Club in Ardmore, Pennsylvania. At the roundtable, 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.
The roundtable discussion was preceded by remarks from Andrea Kramer, a Managing Director and member of the investment committee at Hamilton Lane. Ms. Kramer is responsible for the oversight and management of Hamilton Lane’s global Fund Investment Group. Ms. Kramer opened with a summary of the trends that she is seeing in the private equity market today, which included a rise in fundraising numbers, growth in the venture capital market and the increasing popularity of limited partner co-investments. Ms. Kramer then addressed questions from participants regarding current levels of alternative asset investments and various fee arrangements.
Following the introductory remarks, there was an open discussion among bankers, private equity sponsors and other guests. The discussion focused on the current climate for deals, recent trends and expectations for the future. Below are some highlights:
- The conversation began with a discussion of the effect of Hurricane Harvey on the private equity market. There was a consensus regarding the human tragedy and the struggle for private equity sponsors to react quickly enough to the resulting market changes for there to be a meaningful short-term impact. With respect to existing investments, participants discussed the steps they took to ensure uninterrupted access to appropriate inventory and other supplies and the need to provide rebuilding support to affected regions.
- Discussion then turned to the availability of credit in the current market. Participants noted that alternative lending sources continue to play a prominent role in the credit market and discussed the impact of regulation generally, as well as the leveraged lending guidelines, in particular on traditional lending sources.
- Participants discussed trends that have emerged or continued in the market since the 2016 roundtable discussion. There was general agreement that multiples have remained at elevated levels – particularly in the technology and health care sectors – over the course of the last year, in part due to the abundant supply of equity capital. Sponsors observed that strategic buyers are playing a significant role in the competitive landscape of the private equity market. Participants also discussed trends in deal terms, such as an increase in the use of representation and warranty insurance and a reduction in the size of indemnification caps. There was also discussion regarding longer investment holding periods and how that trend relates to the pursuit of high-growth companies.
- Discussion turned to the abundance of “dry powder” in the private equity market and the resultant effect on the strategy used in pursuing quality investments or portfolio sales. Private equity fund participants discussed increased specialization, including the use of in-house operating partners and creativity in sourcing and structuring deals on the buy side. On the sell side, participants noted the importance of taking a broad approach, and again the conversation touched on the increased role of strategic buyers.
- The meeting closed with a discussion of the current regulatory landscape. Participants discussed the lack of movement over the last year on the regulatory front and predicted that congressional action in this area, if any, would be marginal. The group discussed the recent executive order laying out the core principles for regulating the United States’ financial system and the progress that has been made thus far in furtherance of these principles, with a particular focus on the interagency guidance on leveraged lending and the future of the Dodd-Frank regulatory regime.
We will continue to monitor trends and developments in this area. For more information on the matters discussed in this alert, please contact one of the Corporate and Securities lawyers listed below, or your regular contact at Drinker Biddle.