Keynote Q&A: What are sponsors prioritising in today’s market?

Geopolitical shocks and AI temporarily disrupted an anticipated rally in sponsor-backed M&A and financing activity, but sponsors and lenders have shown a remarkable capacity to adapt.

Sponsors and their lenders have become accustomed to volatility. Although repricing activity paused briefly following geopolitical disruptions, financing markets reopened quickly. Spreads have tightened and new deals are attracting strong demand.

Firms are determined to push transactions forward, rather than waiting for perfect conditions that may never materialise. Capital must be deployed and PE general partners must fulfil investment mandates.

The most interesting outcome to emerge from the recent volatility has been a bifurcation between market participants. Some sponsors stepped back entirely, while others saw an opportunity to move aggressively when competitors paused. In certain situations, seller expectations adjusted downward while buyers remained well capitalised, opening up deal flow that was simply not available at the beginning of the year.

The market has decisively moved on from the simple debate about broadly syndicated loans (BSL) versus private credit.

At the large-cap end of the market, the differences between BSL and private credit have narrowed. Sponsors are benefitting from the competition: Private credit providers are lowering margins and easing covenant requirements, while BSL markets are sharpening execution and managing flex better. The availability of niche debt instruments to devise bespoke financing structures also adds further competition to the mix.

Sponsors now curate financing structures that draw on multiple sources of capital simultaneously.

A year ago, there was a perception that private credit was poised to dominate every segment of sponsor finance, but what we see now is a more balanced market. Private credit remains an important source of capital, particularly for Holdco instruments and payment-in-kind (PIK) facilities. Syndicated markets are delivering large senior debt packages at attractive margins for sponsors.

We also see sponsors adapting to perceived shifts in private credit deal execution timetables, as investment committees of debt funds take longer to assess credit risk and sector exposure. The perceived gap between BSL execution risk and private credit risk has narrowed over the past 12 months.

CVs are providing sponsors with more options when it comes to managing hold periods and distributions, but we have not seen CVs fundamentally reshape financing strategies.

What is interesting is that even though change-of-control provisions are so flexible that sponsors could put an asset into a CV without having to refinance, many sponsors are choosing to refinance anyway.

Sponsors want CVs to be viewed as viable, standalone transactions, so will typically refinance debt when assets are transferred into a CV.

There is so much attention on ensuring that all stakeholders are treated 100 per cent fairly that sponsors tend to finance CVs as if they were new transactions with a new capital structure set up for the life of that investment.

Successful financing processes are rarely defined solely by economics.

Lenders are willing to accept lower pricing and higher leverage multiples in deals where the transaction timetables are well organised, and the legal frameworks are transparent. 

Problems and delays occur when unusual structures are introduced late in a process, without giving lenders enough time to understand how risk is allocated and how structures will function. Strong execution is becoming as important a differentiator as pricing and leverage in the sponsor financing market.

Financing markets are very much open for business, but sector preferences are surfacing and debt providers are becoming more selective.

Businesses with defensive characteristics, recurring revenues or infrastructure-like qualities will generate more lender interest and favourable financing terms for borrowers.

Conversely, borrowers in sectors facing disruption and challenging commercial fundamentals will find it more difficult to secure financing, even if the overall market conditions are favourable.

One noticeable trend is the adoption of PIK instruments and Holdco financing as standard. The market used to view these debt structures as niche options, but they are now appearing across a wider range of transactions.

This reflects how sponsors have become more sophisticated. They are tailoring capital structures to individual businesses, rather than just taking what is on offer from specific capital providers.

Perhaps the biggest blind spot for market participants is focusing too much on ticking boxes. Certain protections may address a specific transaction that occurred several years ago, but it does not necessarily mean the documentation protects against future risks.

The broader challenge is understanding how an entire document functions rather than concentrating on a small number of headline provisions. For example, after a series of high-profile LME deals, lenders are hyper-focused on LME protections when other areas of documentation are equally, if not more, important. Asset disposition provisions, value leakage mechanics and transfer flexibility are documentation points that could have a far greater impact on creditor outcomes over time.

Asset disposition provisions, for example, can create substantially more flexibility than many lenders initially appreciate. Lenders will benefit if they pay closer attention to what assets can be sold, what happens to the proceeds and how those proceeds can be distributed. We would expect this area to become a major topic for negotiation throughout the next year.