US Private Equity Mid-Market Monitor: Q3 2020 (1)

YTD restructuring activity continues to be dominated by companies in the retail and consumer, energy, telecom and travel-related industries
The leveraged loan default rate increased to 4.17% through the end of 3Q and up from YTD 2Q which ended at 3.23% as the third quarter saw 11 issuers default on $10.6 billion of loans [1]
This is juxtaposed with a leveraged loan market, as measured by the S&P / LSTA leveraged loan market, that reached positive territory in September, for the first time since late March [2]
The Federal Reserve’s initiatives bolstered the capital markets and were a key contributor to the recoveries in the high yield and leveraged loan market since February
While the overall loan and high yield markets have recovered to pre-pandemic levels, a large number of issuers who entered into covenant amendments as a result of the pandemic will require renegotiation or extension of the covenant holidays by the summer of 2021
As a result, we anticipate that restructuring activity will shift from 2020 into 2021 who have not yet seen a recovery in operations through their covenant holidays

Similar to 1H 2020, over the last quarter we've seen a growing number of companies choosing to delay their pre-pandemic full exit strategies by a couple of years and pursuing a growth capital raise instead
In our view, many of these capital raises will significantly increase valuations for these companies down the line, which would then offset dilution resulting from capital injections
We anticipate that there will be an increase in fund raising in the coming months in areas that have been particularly active during the Covid-19 pandemic e.g. healthcare IT, supply chain and e-commerce
For PE firms that need to access capital from LP’s to complete a transaction, a strong LP base is critical as co-investor dollars have been increasingly harder to access in this climate

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