Authored by Hugh Selleck (Managing Director)
Over the past six weeks, we have had a number of conversations with borrowers who have found themselves in a difficult position.
In each case, a financing transaction appeared to be progressing as expected. Commercial terms had been agreed, due diligence was well advanced, and the borrower had every reason to believe funding would settle on time.
Then, with very little warning, the prospective funding disappeared.
Initially, we saw this occurring with a handful of private credit providers. More recently, we are hearing similar stories involving banks. For borrowers, the consequences can be dire. Acquisitions are delayed or lost, refinancings pushed back and growth plans put on hold while an alternative source of capital is found.
While every transaction is different, the frequency of these conversations suggests something has shifted. In our view, the market spent the past few years competing on who could offer the lowest cost capital. Today, borrowers are increasingly asking a different question: who will actually be there on settlement day?
So, what is behind this trend?
A promise of available capital isn’t the same as committed capital
It is well known that private credit is a fast growing asset class in Australia. New funds have launched, international managers have entered the market and competition for quality lending opportunities has intensified.
On the surface, there appears to be no shortage of capital.
However, available capital isn’t necessarily the same as committed capital.
There is an important distinction between a lender with committed capital and one that is still managing liquidity or raising capital. In more cautious markets, that difference can determine whether a transaction settles at all.
At GCI, the distinction has always mattered.
For example, before we issue a term sheet, two things must already be true:
- We have committed capital available to fund the transaction.
- The balance between risk and return justifies making the investment.
From there, our focus is on completing the transaction, provided the assumptions underpinning the deal remain unchanged.
Investing versus deploying capital
There is also an important difference between investing capital and simply deploying it.
During the investment period for GCI Strategic Capital Fund 1, we lost a number of opportunities because we were not prepared to increase leverage simply to win the deal.
Winning every deal has never been our objective. Our purpose is to provide funding structures that remain appropriate throughout the life of the loan and are sustainable for the borrower to allow repayment of the loan and achievement of their commercial objectives. We do not want to be in the “loan to own” business.
During periods of abundant liquidity, there will be lenders willing to stretch on leverage or compress pricing to win market share. While taking advantage of this can appear attractive for a borrower, the real test comes later.
Lending decisions made at the margin become much more significant during periods of uncertainty and macro economic stress. Disciplined underwriting not only manages risk, it also gives borrowers greater confidence that their funding partner will remain supportive throughout the life of the investment.
Why certainty of funding matters
Recent market commentary has highlighted increased scrutiny across both banks and private credit. At the same time, some lenders are reassessing portfolio concentrations, liquidity management and risk appetite.
As a result, borrowers should look beyond pricing and leverage and ask where a lender’s capital comes from, whether it is genuinely committed and whether the lender has a track record of completing transactions.
Increasingly, certainty of funding is becoming more important than leverage or pricing.
Over the past six months, GCI has raised $250 million of committed capital across our investment strategies and has over $300 million to invest, with a significant allocation available for Strategic Capital opportunities. Committed means that investors have signed binding legal documents and face significant penalties for not meeting a capital call.
As some lenders become more selective, fundamentally strong businesses are increasingly being overlooked despite representing attractive lending opportunities.
That is exactly where we believe experienced private credit managers can provide value.
If you are advising a borrower who requires a creative debt solution and values certainty of funding, we would welcome the opportunity to have a conversation. In today’s market, knowing your lender has committed capital and the discipline to stand behind its term sheet may prove just as valuable as the pricing itself.