M&A rebound will drive private credit volume increase: Golub Capital

As the Federal Reserve signaled delays in rate cuts after meeting earlier this month, more investors have adopted for a wait-and-see attitude. Those who were bullish on rate cuts expected that global M&A deal volume, which fell to a 10-year low last year, would recover under lower rates.  

US-based Golub Capital, a leading private credit investor managing more than $65 billion in capital, maintains its forecast that global M&As will rebound over the next 12 to 24 months as inflation cools, boosting private lending for those looking for buyout opportunities.

Investor demand for direct lending, which provides low double-digit returns, will continue as mid-market companies show robust earnings and need funds for growth, said Gregory Cashman, co-head of direct lending at Golub Capital.

Founded in 1994, the private credit manager mainly invests in business-to-business software, information services, healthcare, specialty consumers and financial services in the US and Europe. The firm targets first lien, senior secured loans with floating rates for fast-growing private firms with less than $100 million in earnings before interest, taxes, depreciation and amortization (EBITDA).    

The asset manager is growing its presence in Asia. It launched a Seoul office last September as its second overseas affiliate, after the London office set one up in Hong Kong last December and another in Tokyo last month. Korea Investment Corporation (KIC), the world’s 15th-largest sovereign wealth fund, holds a minority stake in the asset manager. 

“Asian investors’ demand for private debt has been significantly increased on the stability and attractive yield. Korean investors, in particular, have quickly developed their expertise in direct lending and due diligence in recent years. They are very dynamic in terms of asset allocation and value transparency,” Cashman told The Korea Economic Daily during his visit to Seoul in April.   

Uncertainty over a rate cut timeline is the greatest challenge for private credit strategies, making business valuations for M&A deals hard, he noted.

But global M&A deals, which hit a 10-year low of $3 trillion last year, will recover over the next 12 to 24 months due to the strong US economy, investors’ growing needs for exits, slowing inflation and business profitability growth, particularly in mid-market, he added.

Mid-market private companies on Golub Capital Altman Index, the asset manager’s in-house index, showed more than 10% EBITDA growth for a third straight quarter in the January-March period of this year.

Cashman believes the growth will be consistent for the time being, increasing the firms’ demand for private credit. Direct lending still generates attractive risk-adjusted returns despite recent pricing cuts in private credit amid increased competition among lenders, he said.  

Over the past 30 years, the asset manager has experienced the dot-com bubble, the 2007-'08 global financial crisis, the oil glut in the 2010s and COVID-19. It has offered consistent risk-adjusted returns by sticking to its principle of investing in non-cyclical businesses.

“Our focus is on durability and high-recurring revenues of businesses in B2B software, information services, healthcare, specialty consumers and financial services which are resilient. We are very cautious in economy-sensitive sectors such as construction, real estate, oil and gas, commodities and chemicals. We also partner with private equity sponsors with long and strong track records. We have proved a consistent level of risk-adjusted returns based on these principles,” Cashman said.

Elevated rates give private lenders increased risks of default by their portfolio companies. Golub Capital has seen no defaults since 2023 as the firms flexibly managed their finances, Cashman said.

“Some of our portfolio companies reduced their expenses and improved profitability as our PE sponsors provided additional equity capital to pay down their debts. Some PE firms worked with the companies to address challenges on business management. I believe high rates are not always a risk. It can be an opportunity.”

Write to Jihyun Kim at snowy@hankyung.com
Jennifer Nicholson-Breen edited this article.