In recent years, private credit has emerged as a dominant force in the private equity (PE) space, particularly in the realm of mergers and acquisitions (M&A). As traditional banks pull back from higher-risk lending, private credit funds are stepping in to provide the capital necessary for leveraged buyouts and other acquisition strategies. In 2024, private equity deals financed by private credit are gaining momentum, and several trends are defining this shift.

If you’re a private equity investor or a financial professional navigating M&A, understanding the dynamics of private credit will be crucial for identifying opportunities and maximizing returns.

  1. Private Credit Grows as a Major Source of Deal Financing

Private credit is playing an increasingly vital role in financing M&A deals within the private equity space. In fact, the global private credit market has reached over $1.5 trillion, driven by its flexibility and ability to provide tailored financing solutions. This growth is due to private equity firms seeking alternative sources of financing as banks face more stringent regulations post-financial crisis.

Private credit offers customizable structures, such as asset-based lending (ABL) and cash flow lending, enabling private equity firms to access capital for acquisitions without relying on traditional banking institutions.

  1. Rise of Unitranche Financing in Private Credit Deals

One of the biggest trends in M&A financing by private credit is the rise of unitranche financing. This hybrid loan structure combines senior and subordinated debt into one single debt facility, simplifying the capital structure for private equity buyers. Unitranche loans are attractive because they reduce the need for multiple layers of financing, making the process quicker and more efficient.

For private equity firms, unitranche loans offer flexibility in terms of interest rates and repayment terms, allowing them to focus on growing their portfolio companies post-acquisition rather than managing complex debt arrangements.

  1. Increased Demand for Second-Lien and Mezzanine Financing

In 2024, private equity firms are increasingly turning to second-lien loans and mezzanine financing to fund M&A deals. These financing structures, often provided by private credit funds, allow firms to enhance their purchasing power by stacking additional debt behind a primary loan (often a first-lien loan).

While second-lien and mezzanine loans come with higher interest rates, they provide PE firms with access to larger pools of capital, making them ideal for larger or more complex acquisitions. This demand is particularly prevalent in competitive sectors like technology, healthcare, and consumer goods, where higher valuations require creative financing solutions.

  1. Growth of Sponsor-Led Buyouts and Recapitalizations

Another emerging trend is the rise in sponsor-led buyouts and recapitalizations financed by private credit. In these transactions, private equity sponsors retain a significant stake in their portfolio companies while using private credit to facilitate growth or liquidity events.

This trend has become especially popular in middle-market M&A, where private equity sponsors seek additional capital to fuel expansions, acquisitions, or strategic exits. By leveraging private credit, sponsors can maintain control over their investments while positioning themselves for higher returns in the future.

  1. Private Credit Fuels Growth in Distressed and Special Situations M&A

Private credit also plays a pivotal role in distressed M&A and special situations, particularly in industries impacted by economic downturns or sector-specific challenges. Unlike traditional lenders, private credit providers have more flexibility in underwriting risk, making them ideal partners for companies in financial distress or undergoing restructuring.

In 2024, private equity firms will increasingly use distressed debt funds and special situations funds to acquire troubled companies at discounted valuations. These deals present significant upside potential, especially when backed by private credit financing that offers creative solutions to address liquidity issues and operational challenges.

Here are five notable private equity deals in 2024 where distressed debt funds were used to acquire troubled companies at discounted valuations:

  1. Apollo Global Management led a significant distressed buyout in the retail sector, acquiring a chain of underperforming stores. Leveraging distressed debt strategies, Apollo capitalized on the company’s overleveraged position, enabling a favorable acquisition​ DDTalks
  2. Oaktree Capital Management was involved in acquiring a struggling industrial services company in Europe. The firm utilized distressed debt to facilitate the acquisition, betting on a turnaround through restructuring and operational improvements​ DDTalks
  3. Fortress Investment Group secured a major distressed debt acquisition of a U.S.-based real estate development firm. The deal focused on restructuring debt and unlocking asset value in a market facing rising interest rates and declining valuations​ PitchBook DDTalks
  4. KKR successfully executed a distressed buyout of a healthcare services provider struggling with rising debt service costs. The deal was structured through a combination of second-lien loans and distressed debt, allowing KKR to take a controlling stake at a reduced valuation​ Mergers & Inquisitions
  5. Strategic Value Partners closed a high-profile distressed acquisition in the energy sector. The fund capitalized on the company’s inability to refinance existing debt amidst rising interest rates, acquiring it at a substantial discount​PitchBook Mergers & Inquisitions

These transactions underscore the growing role of private credit and distressed debt strategies in 2024, as private equity firms continue to identify opportunities in sectors facing financial distress due to macroeconomic pressures.

  1. Private Credit Enhances Flexibility in Deal Structuring

One of the main advantages of private credit over traditional bank loans is its ability to offer flexible deal structures. Private credit funds can craft tailored financing packages that align with the specific needs of the acquisition, whether it’s through stretched asset-based loans, cash flow term loans, or hybrid solutions like mezzanine and second-lien loans.

This flexibility enables private equity firms to pursue a wider range of M&A opportunities, including more complex transactions, cross-border deals, or acquisitions in niche sectors that may not qualify for conventional financing.

  1. Shift Towards Relationship-Based Financing

In 2024, private equity firms are placing increased emphasis on building long-term relationships with private credit providers. Unlike traditional banks, which may view loans as transactional, private credit lenders often take a relationship-based approach, working closely with private equity sponsors to understand their long-term growth strategies and financial needs.

This collaborative approach fosters deeper partnerships, providing private equity firms with more reliable access to capital across multiple transactions, particularly in competitive or challenging environments.

Conclusion

As we’ve navigated through 2024, private credit is reshaping the landscape of mergers and acquisitions in the private equity space. From the rise of unitranche financing and second-lien loans to the increasing role of private credit in distressed M&A, this financing offers private equity firms the flexibility, speed, and capital they need to compete in an increasingly competitive market.

Private credit has proven to be a vital alternative to traditional bank lending, allowing private equity firms to unlock more value from their acquisitions while maintaining control over their capital structure. As private equity continues to evolve, private credit will likely remain a cornerstone of M&A financing, helping firms drive growth and maximize returns.

By Todd Vandegrift

Managing Partner at EdgeWork Capital