Gregory Cashman, co-head of direct lending at Golub Capital (Courtesy of Golub Capital)
As the Federal Reserve signaled delays of the rate cuts after the meeting earlier this month, more investors have chosen a wait-and-see mode. Those who were optimistic on rate cuts expected that global merger and acquisition deal volume, which dropped to a 10-year low last year, would recover with lower rates.
US-based Golub Capital, a leading private credit investor managing more than $65 billion in capital, maintains its forecast that the global M&A will rebound over the next 12 to 24 months as inflation cools down, boosting private lending for those looking for buyout opportunities.
Investors’ demand for direct lending, which provides low-double-digit percentage returns, will continue as mid-market companies show robust earnings and need funds for growth, said Gregory Cashman, co-head of direct lending at Golub Capital.
Founded in 1994, the private credit manager primarily invests in business-to-business software, information services, healthcare, specialty consumers and financial services in the US and Europe. The firm targets first lien, senior secured loans with floating rates for fast-growing private firms with less than $100 million in earnings before interest, taxes, depreciation and amortization (EBITDA).
The asset manager is actively expanding its presence in Asia. It launched the Seoul office last September as the second overseas affiliate after the London office, set up one in Hong Kong last December and another in Tokyo last month. Korea Investment Corporation (KIC), the world’s 15th-largest sovereign wealth fund, holds a minority stake in the asset manager.
“Asian investors’ demand for private debt has been significantly increased on the stability and attractive yield. Korean investors, in particular, have quickly developed their expertise in direct lending and due diligence in recent years. They are very dynamic in terms of asset allocation and value transparency,” Cashman told The Korea Economic Daily during his visit to Seoul in April.
Golub Capital
The uncertainty over rate cut timeline is the biggest challenge for private credit strategies, making business valuations for M&A deals hard, he noted.
But the global M&A deals, which hit a 10-year low of $3 trillion last year, will recover in a large scale over the next 12 to 24 months due to the strong economy in the US, investors’ growing needs for exits, slowing inflation and business profitability growth, particularly in mid-market, he added.
Mid-market private companies on Golub Capital Altman Index, the asset manager’s in-house index, showed more than 10% EBITDA growth for a third straight quarter in the January-March period of this year.
Cashman believes the growth will be consistent for the time being, increasing the firms’ demand for private credit. Direct lending still generates attractive risk-adjusted returns despite recent pricing cuts in private credit amid increased competition among lenders, he said.
The asset manager has experienced the dot-com bubble, the 2007-08 global financial crisis, oil glut in the 2010s and COVID-19 over the past 30 years. It has offered consistent risk-adjusted returns by sticking to its principle of investing in non-cyclical businesses.
“Our focus is on durability and high-recurring revenues of businesses in B2B software, information services, healthcare, specialty consumers and financial services which are resilient. We are very cautious in economy-sensitive sectors such as construction, real estate, oil and gas, commodities and chemicals. We also partner with private equity sponsors with long and strong track records. We have proved consistent level of risk-adjusted returns based on these principles,” Cashman said.
Elevated rates gives private lenders increased risks of default of their portfolio companies. Golub Capital has seen no default case since 2023 as the firms flexibly managed their finances, Cashman said.
“Some of our portfolio companies reduced their expenses and improved profitability as our PE sponsors provided additional equity capital to pay down their debts. Some PE firms worked with the companies to address challenges on business management. I believe high rates are not always a risk. It can be an opportunity.”
By Jihyun Kim
snowy@hankyung.com
Jennifer Nicholson-Breen edited this article.
