Checking in on Private Credit

Everything has gotten riskier and scarier . . . and it's pretty much fine. Better than fine, even.

• from hero to zero, a big EV write-down

• private co valuations can be a fickle thing

• is private credit hiding some surprises? maybe, but if so, they’re very good at hiding

• lenders took on a bit more risk (but not much)

• loan performance is a little worse (but not much)

• middle market earnings are . . . growing (except for one sector)?

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LP, FO & FOF Conference

Just a quick announcement before the main event.

I’ll be moderating a panel today on the role of fund-of-funds, and their value proposition to LPs.

It’s part of a virtual conf with 1000+ LPs, Family Offices, Funds of Funds, & GPs of VC, PE, RE, & Hedge Funds – Nov 26 on Zoom starting at 10am New York / 3pm London for 4 hours, join any time.

Register for the conference here (and email me for a DISCOUNT CODE).

Lots of interesting content, speakers, and virtual networking, and great for anyone raising a fund or looking to allocate.

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Checking in on Private Credit

This is a brief look at some data around the performance of private credit, but first, a writed own.

Hero-to-zero

Goldman Sachs recently announced a $900M write-down related to its investments in Northvolt, a Swedish battery maker.

The striking thing about the write-down isn’t so much that it happened—the EV market (and European manufacturing generally) has shifted a lot, and hardware investing is always risky.¹

No, the striking thing is that, only seven months ago, Goldman was very bullish on its investment:

The losses mark a sharp contrast to a bullish prediction just seven months ago by one of the Goldman funds, which told investors that its investment in Northvolt was worth 4.29 times what it had paid for it, and that this would increase to six times by next year.

FT

The bankruptcy comes just seven months after a ~4x mark-up, with hopes for a 6x mark by 2025.

How does a company go from hero to zero in just seven months?

Well, Northvolt was a loss-making company that apparently spent ~$30M per week to fund operations. If capital markets (and BMW) turn on you, when you’re operating under those conditions, then you can run out of money in a hurry, even if you had raised ~$15B (and VW is your largest shareholder).

So, it can happen. But the point here isn’t to hate on Goldman or Northvolt.

The point is really to highlight that private market valuations can be a bit squishy. Northvolt is a bit of a special case, insofar as it made no pretense of being profitable, so “going to zero” was always a not-to-distant possibility, if it failed to raise fresh capital. But even for companies that aren’t lossmakers (or binary options), it’s still not entirely clear how much they’re really worth (especially when no one is buying).

Private companies don’t report earnings and they don’t trade publicly—those are the defining characteristics of public companies. So, valuation is a bit more art than science (but still plenty of science too), and depends a lot on the manager’s own discretion.²

Anyways, the Northvolt write-down is as good occasion as any to wonder “how are those private companies doing? Are there any other surprises out there?”

The question is especially pertinent given the surge of private credit, because if we know anything about frothy, opaque, interconnected lending markets, is that (a) races to the bottom can happen; and (b) credit markets really don’t like surprises.

And yes, private credit has rushed to fill the void left by riskier classes of equity:

Pitchbook

There are far fewer “venture loans,” but the overall value of those loans is much higher.

In other words, lenders are writing fewer, but much bigger, checks. They are playing the role of growth stage equity, at the moment.

So how is private credit holding up?

It’s a little hard to say, but from the data I wanted to highlight today (which comes primarily from an ACC report, “the future of private credit”), the answer is “pretty well, actually.”

Lenders are taking a bit more risk

Private Credit is no secret strategy anymore.

It’s really just banking, which means not only are private credit managers competing with other private credit managers for the right to lend, but they’re also competing with banks. All that competition can lead lenders to lower their standards a bit, creating the infamous “race to the bottom.”

It turns out that lenders are taking a bit more risk, but it’s nothing crazy.

For example, debt-to-ebitda ratios have gotten a bit scarier at the margins: