Private Markets at a Crossroads as Retail Push Collides With Quality Concerns | Weekly Pulse

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Private Credit Faces Growing Pains as Regulators and Investors Sound Alarms

Bottom Line: 

• The $1.7 trillion private credit market is experiencing increased scrutiny from regulators and investors as dividend cuts, regulatory concerns, and high-profile bankruptcies expose vulnerabilities in the rapidly expanding sector.

Why It Matters:

• 📉 Business development companies (BDCs) are seeing significant stock declines, with Blackstone Secured Lending Fund down 21% year-to-date, Blue Owl Capital Corp. down 19%, and Ares Capital Corp. down 12%

• 💰 Blackstone's $75 billion Private Credit Fund cut its dividend by 9% for the first time ever, while Oaktree Strategic Credit Fund reduced its dividend by 10%

• 🏛️ US Senators Elizabeth Warren and Jack Reed have called on the Government Accountability Office to assess systemic risks posed by private credit to the broader financial system

• ⚠️ The UK's Financial Conduct Authority is monitoring the collapse of First Brands Group and Tricolor as "useful case studies" to scrutinize connections between banks and private credit markets

• 📊 Average dividend coverage across 32 BDCs rated by Fitch hovers at around 105%, with many expected to fall below 100% as further rate cuts impact floating-rate portfolios

Big Picture:

• 🌐 The sector's growing pains reflect tensions between rapid expansion and infrastructure readiness, with Goldman Sachs' Marc Nachmann warning that pressure to deploy capital quickly risks creating "poor incentives" and potential "accidents"

• 🔍 Despite concerns, SEC Chairman Paul Atkins stated the administration does not view private markets as "systemically important," signaling regulatory openness to continued growth

• 📈 The secondary market for private credit assets exceeded $12 billion in 2024 and is projected to top $14 billion in 2025, providing new liquidity options as the market matures

Trends to Watch

• 💼 Hybrid Financing Models Gaining Traction: Borrowers are increasingly using three-track financing combining institutional investors, banks, and private credit to optimize pricing, increase leverage, and ensure capital certainty

• 🏦 Regional Banks Partnering with Private Credit: Analysis found 16 investment partnerships between the 50 largest US banks and private credit firms, ranging from deal sourcing to joint ventures and bank-led direct lending

• 🔄 Continuation Vehicles Going "Squared": Private equity firms are rolling continuation vehicles into second CVs as the dealmaking slump continues, with GP-led deals projected to exceed LP-led deals for the first time in 2025

• 🌍 Middle East Emerging as Private Credit Deployment Hub: Gulf region developers and infrastructure investors are attracting private credit financing, with Oaktree, Janus Henderson, and regional players launching funds focused on MENA opportunities

• 📊 Private Equity Refocusing on Operational Improvements: Ontario Teachers' Pension Plan created a Portfolio Solutions department to return to "old-school private equity" focused on operating-company-level results rather than financial engineering

• 🎾 Retail Marketing Push Raising Concerns: Private capital firms are increasingly sponsoring high-profile events like the US Open, with Sixth Street's Josh Easterly flagging ubiquitous marketing as a potential area of concern

Industry Insights: Strategy & Outlook

• 🎯 Bain Capital advocates for caution in slower growth environment: Chris Gordon, Bain's global co-head of private equity, warned that positive tailwinds from cheap credit and rising valuations are fading, requiring slower investment regimes of three to four years instead of faster deployment

• ⚡ Data center boom brings overbuilding risks: Ares Co-President Kipp deVeer cautioned that when significant capacity comes online, "some of it at the end of the day has to be marginal," emphasizing the importance of being selective and measured in data center investments

• 🤖 AI impact requires careful portfolio monitoring: Bain Capital's David Humphrey noted that labor-intensive businesses employing white-collar professions face new risks from AI, while companies with proprietary data or productivity-driven AI applications stand to succeed

• 🏗️ Infrastructure investment momentum continues: Manulife closed its largest-ever infrastructure fund with $5.5 billion, while Ares raised $5.3 billion for infrastructure secondaries, reflecting robust investor appetite for digital infrastructure, energy, and transportation assets

• 🇯🇵 Japan becoming fertile ground for private equity: With almost 4,000 publicly traded companies and corporate governance reforms encouraging efficiency, Japan has seen 192 private equity deals year-to-date after 292 in all of 2024, with leveraged-buyout financing costs of 3-4% versus 8-9% in the US

• 💹 IPO market showing cautious improvement: JP Morgan's Matt Gehl noted that startups who previously said "private for longer" are now beginning to scope out the IPO process, though investors may need to wait until 2027-2028 for a meaningful revival

Deal Spotlight: Transactions & Strategies

• 🎮 JPMorgan commits record $20 billion for Electronic Arts take-private: The financing for the $55 billion acquisition by Saudi Arabia's Public Investment Fund, Silver Lake, and Affinity Partners represents the largest-ever commitment by a single bank, with Middle Eastern banks expected to participate as loan investors

• 🧪 Carlyle nears €7 billion BASF coatings unit acquisition: Bank of America and Goldman Sachs are arranging a debt financing package of more than €4 billion to back the deal with Qatar Investment Authority, creating a standalone company with €7.7 billion enterprise value

• 🏥 Warburg Pincus takes stake in French diagnostics group Sebia: The private equity firm is acquiring roughly a third of the business in a deal valuing Sebia at €5.4 billion, with equity support from Singaporean sovereign wealth fund GIC

• ⚡ Ardian acquires Irish utility Energia for €2.5 billion: The French investment firm is betting on AI-driven energy demand, with Energia providing power to over 900,000 homes and businesses across Ireland and owning 16 onshore wind farm sites

• 🤖 SoftBank to buy ABB's robotics unit for $5.4 billion: The transaction reflects Masayoshi Son's growing bets on emerging technology in artificial intelligence and robotics

• 💊 CVC sells Stada stake at €10 billion valuation: Bain Capital completed the sale of the German healthcare group, representing one of the largest healthcare exits in Europe

• 🔌 BlackRock's GIP nearing deal for Aligned Data Centers: The transaction would be one of BlackRock's largest-ever infrastructure investments and a major expansion of its AI-related bets, with GIP also in talks to buy AES Corp. at a $38 billion enterprise value

Fundraising Focus: Capital Formation

• 💰 Bain Capital raises $14 billion for US buyout fund: The firm secured $12 billion in fee-paying outside capital plus over $2 billion from the firm and partners, beating the initial $10 billion target and representing an 18% increase from the prior fund

• 🏗️ Ares surpasses infrastructure secondaries target with $5.3 billion: The haul includes $3.3 billion for Ares Secondaries Infrastructure Solutions III, exceeding the initial $2 billion target, representing one of the largest capital raises ever for an infrastructure secondaries strategy

• 🌉 Manulife closes $5.5 billion infrastructure fund: The money-management division exceeded its target and prior $4.65 billion fundraising, focusing on mid-market infrastructure assets primarily in the US with investments of $100 million to $500 million each

• 💳 Coller quadruples private credit secondaries fundraising: The firm raised $6.8 billion for its latest private credit secondary offering, more than four times the $1.4 billion raised in 2022, with Pantheon closing $5.2 billion for credit secondaries versus $834 million in 2022

• 🏢 CVC's credit unit amasses €10.4 billion for European direct lending: The capital raise represents significant growth in CVC's direct lending capabilities focused on the European market

• 💼 Golub commits at least $1 billion to continuation vehicle strategy: The firm is committing its own capital and raising additional funds to back other private equity firms' single-asset continuation vehicles in middle market companies

• 🔄 Blackstone hits $10 billion target for Asia buyout fund: Investors are betting on the firm's entrenched India presence and expanding footprint in Japan as Asia becomes a key growth market

Market Spotlight: Regional Developments

• 🇬🇧 UK: Aberdeen warns government over private asset transparency challengesThe fund manager is presenting a policy paper highlighting significant challenges for retail investors accessing private markets, including concerns over valuation transparency and performance variations, while recommending introduction of reporting standards and a "gold standard" for valuations

• 🇬🇧 UK: Regulators monitoring First Brands and Tricolor collapses for systemic risksThe Financial Conduct Authority is using the twin US defaults as "useful case studies" to scrutinize connections between banks and market-based lenders, checking leverage levels and concentration risks in private credit markets

• 🇯🇵 Japan: Private equity sees golden opportunity in corporate reformsCorporate governance reforms and activist pressure have made Japan more receptive to buyouts, with 192 deals year-to-date and favorable financing costs of 3-4% versus 8-9% in the US attracting firms like Bain, Blackstone, EQT, and KKR

• 🇦🇪 UAE: Developers launching private credit funds for construction boomAbu Dhabi's Aldar Properties and Dubai's Binghatti Holding are setting up funds to lend to construction firms, with Binghatti planning to raise $500 million to support subcontractors and suppliers amid the region's building boom

• 🇻🇳 Vietnam: Vingroup seeks $500 million for EV charging expansionThe Vietnamese conglomerate approached private credit funds in late September for financing at around 10% interest to expand its electric vehicle charging station network across the region

• 🇺🇸 US: Texas pension launches $15 billion co-investment programThe Texas Municipal Retirement System plans to invest globally over five years targeting deals of $10 million to $200 million, focusing on automation through AI, healthcare innovation, and supply chain strengthening

• 🇮🇳 India: Blackstone expands private credit presenceThe firm hired Apurva Shah for a top role in its private credit and insurance business as global funds regained dominance in India's private credit market with a 68% share in $9 billion of deals through June