Stefan Shaffer shares the latest US Private Capital Report for November 2024. M&A is entering the holiday season with competitive pricing, robust liquidity, and record-breaking leveraged loan activity. While deal flow remains slow, rising leverage metrics and favorable market conditions signal a major shift ahead. 2025 is set to unlock new opportunities read the full report to prepare for what’s next.
Competitive Pricing and Strong Liquidity
Coming into the holiday season, SPP is not making any changes to its pricing or leverage metrics. Credit spreads and leverage multiples remain at their most competitive levels of the year, and with middle-market M&A deal flow still relatively anemic, it is more than likely that current liquidity conditions will persist into the new year.
Though the magnitude and frequency are still subject to debate, it is widely anticipated that the Fed will continue its current path of quantitative easing. The Fed Funds rate has already been slashed by 75 basis points to a rate band of 4.50%–4.75%, resulting in a current SOFR rate of ~4.60%. Stated more succinctly, current liquidity conditions are “Strong Enough.”
Private Markets Lag but Follow Public Market Trends
Private market pricing and leverage metrics historically lag behind those of the more liquid public and 144A markets. If current traded conditions are any indication of future private market liquidity, pricing for the time being will remain exceedingly aggressive. The average spread for investment-grade bonds has fallen to its lowest level since 1997, while high-yield spreads remain at their tightest levels since the Great Recession in 2008.
Though Goldman predicts spreads will widen marginally by year-end (~13bp higher for investment-grade bonds and ~14bp for high yield), from a historical perspective, the public and 144A markets are trading at incredibly competitive levels. This suggests that private market spreads will likely follow suit in the short term.
To better illustrate current liquidity conditions, let’s look at actual deals executed by SPP in 2024. In March of 2024, a typical middle-market company (e.g., ~$15 million of LTM EBITDA, reasonable total leverage of ~3.75x, non-cyclical sector with well-regarded equity sponsorship) would garner non-bank unitranche pricing of SOFR + 6.50% for an all-in cost of ~11.80% (SOFR @ March 15 ~5.30% + credit spread of 6.50%).
Today, a nearly identical issuer will likely garner a spread of SOFR + 5.5% for an all-in rate of ~10.10% (SOFR @ November 15th at 4.60% + credit spread of 5.50%), i.e., a savings of ~170 basis points. Lower-cost capital translates to higher fixed-charge coverage and, accordingly, greater leverage capacity.
Leverage Metrics: On the Rise Across Middle-Market Deals
Recent empirical data published by LSEG supports this analysis. According to a study published by LSEG, total leverage on sponsored middle-market deals climbed to 4.76x on average in Q3 2024 from 4.61x in Q2 2024, the highest quarterly level recorded since Q1 2022.
As per LSEG, “The increase was driven by both higher senior and junior leverage. First-lien leverage came in at 4.47x in Q3 2024, up from 4.41x in Q2 2024, while junior leverage increased to 0.29x from 0.20x. Looking deeper into this metric, the share of deals with total leverage above 5x climbed to 40% in Q3 2024 from 34% in the prior quarter. At the higher end, the share of deals levered more than 6x ticked up to 13% from 10% in Q2 2024.”
M&A Activity: The Elusive Surge
Notwithstanding the fact that leverage and pricing metrics are among their most competitive levels in years, the much-anticipated “surge” of M&A activity has yet to materialize. Recent data suggests that M&A activity has become increasingly moribund.
Hold periods on private equity (the period between acquisition and exit) have only increased in recent years. As reported in Pitchbook, the median exit hold period and average existing hold period have increased to 6.4 years and 5.3 years, respectively, up from 5.1 years and 4.9 years in 2021.
Refinancing Boom: A Record Year for Leveraged Loans
Leveraged loan activity is not driven by M&A activity but rather by repricing and refinancing. U.S. leveraged loan sales hit a record $986 billion in 2024, surpassing 2017 as the busiest year on record. As reported by Bloomberg, most of this year’s volume came from companies refinancing their current credit agreements and/or locking in lower margins through repricing.
In short, though deal flow has been robust, it has not been accretive. As highlighted by Bloomberg, “The type of deals getting done underscores a painful market dynamic for investors: too much leveraged loan demand and not enough supply of new debt for uses like buyout financing.”
Looking Ahead: The 2025 M&A Breakthrough
Ultimately, we expect the M&A logjam to break open in 2025. A confluence of factors—lower base rates, tighter credit spreads, enhanced leverage capacity (translating to higher enterprise multiples), the need to return capital to LPs, and a likely merger-friendly regulatory environment—will provide a strong incentive to trade. In our view, this environment will be more than “Strong Enough.”
Tone of the Market
Credit spread and leverage multiples in the private market will end 2024 at their most competitive levels of the year, a product of: (i) lighter than average middle market deal flow; (ii) under-invested funds with unprecedented levels of dry powder, still seeking to lock in assets prior to year-end; (iii) increased confidence in a robust and growing macroeconomic environment; and (iv) enhanced optimism for a more forgiving and potentially less restrictive regulatory ecosystem with the advent of a new administration. While Fed interest rate reductions (the Fed funds rate band now sits at 4.50% – 4.75%) have spurred a slight uptick in corporate issuance, the much-anticipated increase in M&A activity has yet to materialize, only increasing the pressure on investors to drive more competitive terms. Market participants remain optimistic that the first half of 2025 will be characterized by an unprecedented surge in M&A-driven transaction activity, which could have a materially adverse impact on pricing and terms, especially in the event of any reversal in recent economic trends or heightened expectation of geopolitical instability.
Equity Investment and Co-Investment
Notwithstanding otherwise aggressive metrics across the market, the level of new cash equity in a deal remains a primary focus point for all leveraged buyouts. Regardless of enterprise multiples, lenders are focused on a minimum 50% LTV (i.e., equity capitalization of 50%). More importantly, actual new cash in a deal should also constitute at least 75% of the aggregate equity account. Most lenders remain reticent to provide aggregate leverage in excess of 4.0x LTM EBITDA with only 20% to 25% new cash equity. While lenders will certainly give credit to seller notes and rollover equity, the new cash equity quantum continues to be an essential and primary underwriting consideration.
Recapitalization Liquidity
The market remains exceedingly recap-friendly, especially where the recap is combined with a more accretive use of capital, such as an acquisition or specified growth capital initiative. While commercial banks remain reticent to fund recapitalization financings absent exceedingly low leverage (<2.0x LTM EBITDA) and LTV metrics (<30% TD/Enterprise Value) combined with a historical credit relationship, non-bank lenders have little or no reluctance to fund leveraged recaps, with leverage tolerances exceeding 4.5x LTM EBITDA for larger middle market issuers (>$20 million of LTM EBITDA). Leveraged recap activity reached its highest level in the first quarter of 2024 since Q1 of 2021.
*Securities offered through SPP Capital Partners, LLC: 550 5th Ave., 12th Floor, New York, NY 10036. Member FINRA/SIPC
斯蒂芬·谢弗（Stefan Shaffer）
执行合伙人兼负责人
Stefan has over 30 years of experience in the private market includes hundreds of transactions in North America, Asia and Europe. Prior to becoming a principal at SPP Capital, Stefan was a Vice President in the Private Placement Group at Bankers Trust Company where he was responsible for origination, structuring and pricing of private placements for the Capital Markets Group, both nationally and internationally.
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