March 13, 2025 – “Waiting for Godot” is a play by Samuel Beckett, first performed in 1953. The work is popular due to its reputation as a cornerstone of absurdist theatre. The play revolves around two main characters who wait endlessly for someone (or something) named Godot, who never arrives. At the end of the play, the characters, after waiting for what seems like countless days, are told that Godot will come tomorrow. The cycle repeats off screen.
Throughout the play, not much happens in a conventional sense. The play highlights the absurdity and meaninglessness of the interactions experienced by the two main characters as they wait for the much-anticipated Godot (of which no one knows who, or what it is). The play is more about the act of waiting itself, the human condition, and the search for meaning in a seemingly indifferent world. Godot’s identity is never revealed—some interpret him as God, hope, death, or something else entirely, but Beckett famously refused to clarify. The characters’ persistence despite futility, their reliance on each other, and the blend of humour and despair drive the work’s enduring impact.
Waiting Not for Godot, but for M&A
Mergers and acquisitions are the lifeblood of the private credit market. The direct lending market primarily exists to finance buyouts by private equity firms. In contrast, large publicly-traded companies typically tap the public bond market or the broadly syndicated loan market for their debt capital needs. When a sponsor-backed (private equity owned) company seeks debt capital to finance its buyout or to fund bolt-on acquisitions, it usually turns to private credit funds. In the fourth quarter of 2024, private credit financed 90% of middle market leveraged buyouts.
Why are so many PE funds turning to direct lenders to provide debt financing for their buyouts? The main reasons include the timing (they can get the capital quickly), the flexible structuring (they can provide features such as payment in kind (PIK) optionality), and certainty of execution (no marketing periods or roadshows for investors are needed).
The bread-and-butter of private credit funds is to offer first lien, senior secured floating rate loans to private equity firms buying middle market companies. Deal flow is the driving force that allows private credit funds to thrive. The more active the mergers and acquisitions environment, the more demand for private credit loans. The greater the demand for direct loans, the more attractive the credit spreads and the more capital that can be put to work in private credit. As long as M&A activity remains robust, private credit will continue to grow and offer attractive yields for investors.
The private equity industry is notorious for having a significant amount of dry powder, which currently represents $2.1 trillion of unspent committed capital. Conversely, not a day goes by without hearing about another private equity fund LP that is waiting on fund distributions financed by divestments (so-called “realizations”). Given current market conditions, private equity funds have been holding onto their investments longer and longer, victims of the slow deal environment.
Essentially, the private credit industry has been waiting for private equity funds to put capital to work in buyouts, which would be funded by direct loans. For each quarter that passes, lenders ask, “When will mergers and acquisitions increase?”
Private credit funds are not waiting for Godot, but for M&A. In contrast to Godot, M&A will come at some point. However, the much-anticipated “Trump bump” in deal activity has yet to materialize, put off by trade war-related volatility.
Nevertheless, the private credit industry continues to grow in leaps and bounds. This publication, the Accelerate Liquid Private Credit Monitor, covers the listed business development company (BDC) market, or what we refer to as the liquid private credit market. The listed BDC market consists of 42 publicly-traded private credit vehicles worth a total of $76 billion, controlling loan portfolios of $152 billion (BDCs are typically leveraged 1:1 debt to equity). For an introduction to the BDC market, see Accelerate’s inaugural private credit monitor:
Publicly traded BDCs are regulated entities that provide loans and credit solutions to small- and medium-sized businesses. They can be easily purchased through brokerage accounts, similar to stocks, as they trade in the secondary market on major exchanges (e.g., NYSE or NASDAQ). Examples include Blackstone Secured Lending (NYSE: BXSL) and Oaktree Specialty Lending (NASDAQ: OCSL). The SEC requires listed BDCs to file financial statements with highly detailed loan portfolio disclosure each quarter, readily facilitating in-depth due diligence and analysis of credit portfolios by allocators.
In addition, the unlisted BDC market is a popular segment of the private credit industry, with many allocators choosing to invest in so-called “semi-liquid” private credit funds (which are marked-to-model, not marked-to-market, and typically provide quarterly liquidity).
Private credit funds structured via listed BDCs offer two main advantages for investors:
- Liquidity – While the loans of BDCs are private and illiquid, typically held for their entire term, listed BDCs trade on the NYSE and NASDAQ, making these private credit portfolios publicly-traded and liquid. Through the listed BDC market, investors can have daily liquidity in the secondary market for nearly four dozen private credit funds. Almost every leading private credit firm has a listed BDC.
- Transparency – One major issue plaguing private asset markets is a lack of transparency into investments. BDCs are SEC-filers, and therefore investors get complete insight into not only the financial condition of the fund but also full transparency into the entire loan book. In each quarterly 10-Q filing and each annual 10-K filing, every loan and investment owned by a BDC is listed, along with loan’s characteristics (borrower, principal, loan type, coupon, spread, cost, fair value, whether the loan is on non-accrual status). In order to judge the quality of a direct lending book, transparency into the underlying loan quality, along with the portfolio’s characteristics (credit quality, diversification, yield, leverage, etc.), is paramount.
The BDC market just wrapped up fourth quarter reporting. Credit conditions remain benign, despite significant macro uncertainty. Private credit spreads have stabilized over the past three quarters, settling in at 500bps – 550bps for core middle market loans (with upper middle market unitranche loans at 475bps – 500bps). Direct lenders noted that spread compression has been more pronounced in the broadly syndicated loan market than in the private credit market. Private markets continue to perform well, with no signs of a slowdown.
While spreads have tightened and base rates have declined over the past 18 months, the average BDC portfolio yield in Q4 was still high at 11.8%. The direct lending market remains one of the most resilient asset classes, and private credit spreads compared to public markets continue to be attractive.
Many BDCs have been transitioning their loan books to first lien and unitranche loans, and fewer unsecured loans, preferring safety of principal by migrating their capital to the top of the capital structure.
In terms of results, Ares Capital (NASDAQ: ARCC) and Blackstone Secured Lending (NYSE: BXSL) led the private credit market with exceptional fourth quarter results. As a bonus, Ares highlighted the successful exit of a previously distressed loan to Potomac Energy Center, which was restructured to equity and then ultimately sold for a $116 million gain (up from a loss of $21 million) upon its recent sale to Blackstone. While a defaulted loan often results in the loss of principal, it is not always the case. One of the core strengths of direct lenders is their ability to restructure secured loans and own the asset in order to recoup its value (and sometimes earn a profit far in excess of the loan value through a reorganization). The successful Potomac exit represented a 60% premium to the loan value for the lender.
In terms of challenged loan books, Oaktree Specialty Lending (NASDAQ: OCSL) has experienced some difficulties, while BlackRock TCP Capital (NASDAQ: TCPC) has struggled immensely, having more loan write-downs than any other BDC. Unfortunately, TCPC was a lender to several private equity-owned companies that ran into trouble last year, including Securus, McAfee, Pluralsight, Thrasio, Razor, Astra, and Khoros. Management of both OCSL and TCPC implemented initiatives to right the ship, such as fee reductions and the reduction of lending activity in challenged sectors. Meanwhile, both of these BDCs trade at double-digit discounts to their net asset values.
There have been some consternations from investors regarding the level of payment in kind (PIK) loans. Aside from a few affected issuers, we have not seen a broad-based rise in PIK income. In fact, PIK income as a percent of total income declined 30bps quarter-over-quarter, falling from 6.9% last quarter to 6.6% this quarter.
Source: Accelerate, Company filings
While credit quality remains good, and BDC performance remains relatively solid, this month’s trade war-related market volatility has caused listed BDCs to trade down and yields to rise. Just twenty days ago, the U.S. and global economies were strong, and equity markets were at or near record highs. Investors, workers, and business owners were feeling great about their prospects.
How quickly things can change. As a nasty trade war has broken out, the S&P 500 has plummeted to correction territory, the volatility index has surged, uncertainty is reigning throughout boardrooms, and recession talk is top of mind for market participants. The Fear & Greed index is pinned at its “Extreme Fear” rating. Things went from 0 to 100 real quick.
With the sudden onset of significant economic and market turmoil, we have witnessed instances of panic selling creeping into areas of the market. For example, many liquid private credit funds that were trading near their net asset values (NAVs) a month ago have been sold down aggressively, and now trade at attractive discounts to the underlying values of their loan portfolios. Historically, buying portfolios of senior secured loans yielding above 10% at 95 cents on the dollar (or less) has worked out very well for those willing to step in and buy during volatile periods such as the one we are currently experiencing. However, this is not to say that NAV discounts cannot widen further.
Within the Accelerate Diversified Credit Income Fund (TSX: INCM), which owns liquid private credit funds that trade in the secondary market, 90% of holdings currently trade at a discount to NAV, and the weighted-average holding trades at a -4% discount to NAV. In contrast, the unlisted BDC market, which continues to grow rapidly in the private wealth channel, with its lack of secondary liquidity, means allocators can only buy semi-liquid unlisted funds at 100% of NAV, compared to listed BDCs which may be available in the secondary market at a discount (and sometimes a substantial one). Why buy at 100 when you can buy at 95 or 90?
Typically, market volatility leads to NAV discounts widening, followed by BDC prices recovering to around NAV once the volatility subsides and investor confidence returns. This dynamic occurred last August as the yen-carry trade unwound, bringing global market volatility with it.
In addition to widening NAV discounts caused by broad market volatility unrelated to credit fundamentals (assuming no recession happens), another interesting market dynamic has recently occurred. There has been a fair amount of consolidation and corporate activity across BDCs. Specifically, Blue Owl recently merged one of its smaller listed BDCs into Blue Owl Capital Corp, now the market’s second-largest listed private credit fund (behind Ares Capital). Two smaller BDCs, Portman Ridge Finance Corporation and Logan Ridge Finance Corporation (both managed by affiliates of BC Partners) announced a merger. MSC Income Fund, a previously unlisted BDC, completed its transition to the listed market through an $85 million IPO.
While Godot did not end up coming in a timely manner (if at all) during the classic play, the private credit industry eagerly awaits an uptick in leveraged buyout activity. If the forecasts of an increase in private equity buyout activity comes to fruition, which seems relatively likely given the $2.1 trillion of private equity dry powder ready to be put to work into buyouts, private credit allocators can look for both spreads and yields to remain attractive as M&A sidesteps Godot and finally arrives.
The Liquid Private Credit Monitor is utilized in running the Accelerate Diversified Credit Income Fund (TSX: INCM), which may have positions in some of the securities mentioned.
