[Edaily Marketin YunJi Kim Reporter] A disconnect is emerging in the global private equity (PE) lending market, where fund raising is on the rise but actual loan disbursements are actually declining. Demand for acquisition financing has fallen as new acquisitions by private equity (PE) funds have slowed, and the timeline for repaying existing loans—and reinvesting the proceeds in new deals—has been delayed due to sluggish exits. Consequently, strategic acquisitions by general corporations and initial public offerings (IPOs) are gaining attention as alternatives to compensate for the narrowed exit channels caused by the slump in PE transactions.

Private Debt Fundraising Is on Track… But Deal Execution Remains Cautious

According to Preqin, a global alternative investment information provider, on the 13th, North American asset managers raised a total of $16.25 billion (approximately 24.3896 trillion won) through new direct lending funds in the second quarter of this year. This represents a 12.5-fold increase from the $1.3 billion raised in the first quarter and marks the highest quarterly fundraising amount in the past two years.

What’s interesting is that while actual direct lending activity plummeted, fundraising remained robust. In the second quarter of this year, the volume of direct lending in the U.S. stood at $33.59 billion (approximately 50.4656 trillion won), a decrease of about 55% from the first quarter’s $74.67 billion (approximately 112.1618 trillion won). The number of transactions also fell from 217 to 154 during the same period.

The decline in direct lending was particularly pronounced in PE-related transactions. In the second quarter, the volume of direct lending to companies held by PE firms stood at $19.4 billion (approximately 29 trillion won), less than half of the first quarter’s $44.61 billion (approximately 67.0087 trillion won). Loans related to leveraged buyouts (LBOs) also fell from around $22 billion to around $9.8 billion.

This is interpreted as a result of a decline in actual transactions rather than a shortage of funds in the market. It is explained that as corporate acquisitions by private equity firms have slowed, demand for acquisition financing has also decreased. In fact, Ernst & Young cited a slowdown in M&A and buyout activity, companies postponing fundraising, competition with the bank-led syndicated loan market, and selective investment execution by private credit managers as the reasons behind the decline in direct lending.

Along with the decline in transactions, lenders are also raising their lending thresholds. With high interest rates increasing companies’ interest burdens, and the possibility of injecting additional funds into existing portfolio companies also a factor, lenders are maintaining a cautious approach toward new lending.

The problem is that even the repayment of existing loans is slow. Typically, when a private equity firm sells a portfolio company, that company repays its existing loans or refinances them. However, as the exit market has frozen, the timing for private credit managers to recover funds and deploy them into other deals is also being delayed.

According to PitchBook, the volume of U.S. private equity transactions in the second quarter of this year fell by about 38% compared to the previous quarter, while the volume of exits decreased by about 46%. This is interpreted as a slowdown in the flow of funds in the private lending market, driven by reduced demand for loans needed for new acquisitions and delayed repayments on existing loans.

With PE Exits Stalled, General Corporations and IPOs

Emerge

as Alternatives

In this environment, strategic acquisitions by

general corporations

and initial public offerings (IPOs) are emerging as new exit channels. While transactions involving the resale of companies to other PE firms have been sluggish, there has been an increase in cases where general corporations acquire PE-held companies or where those companies repay existing loans through an IPO.

According to Morningstar DBRS, among cases where existing private loans were repaid through the sale of PE-held companies between July of last year and July 3 of this year, more than half were achieved through acquisitions by general corporations or IPOs. While transactions between PE firms remain sluggish, analysts note that general corporations and the public offering market are filling the gap, providing some relief for private loan recoveries.

The number of companies using IPO proceeds to repay existing loans is also on the rise. Aerospace and defense firm Applied Aerospace & Defense announced in May that it would use proceeds from its IPO to repay a portion of its $1.02 billion in outstanding debt. AI technology firm Syntient and defense technology firm Avex also reduced their debt in the same manner.

There are also cases where companies secure cash by spinning off parts of their business rather than selling the entire company or going public. Skincare company “Waldencast” and healthcare data firm “Health Catalyst” used funds raised through spin-offs to repay existing loans.

However, industry sources note that cases where loans are repaid through sales or IPOs are not yet considered the dominant trend in the market. According to DBRS, approximately 57% of all cases where credit ratings were suspended over the past 12 months involved refinancing transactions rather than corporate sales or IPOs. In other words, companies were more likely to extend maturities by refinancing with new loans than to secure fresh capital to repay existing ones.

In this regard, a source in the European capital markets stated, “The immediate challenge for the private debt market lies not in raising additional funds, but in securing deals to deploy and recover the accumulated capital,” adding, “While strategic acquisitions and IPOs are providing some relief, the gap between the capital accumulated in the market and actual investment opportunities will widen further unless private equity (PE) deals pick up.”