A borrower’s struggles highlight risk lurking in a surging corner of finance

Wall Street’s new titans have differed significantly in valuing the $1.7bn of debts they provided to workforce technology company Pluralsight, highlighting the risk that some private credit marks are untethered from reality.

The loan is now at the centre of a messy restructuring that the $800bn direct lending industry is closely scrutinising, as Pluralsight’s investors prepare to turn it over to creditors. The divergent marks illuminate one risk regulators have raised about private credit: the inherent difficulty of valuing non-traded loans, which could expose investors in these funds to unforeseen losses.

How the debt and equity tied to all these buyouts are marked is critical because private credit has never played a larger role in financial markets in modern times. Preqin estimates some $10tn is tied up in private equity and credit funds. The marks, especially those that go untouched even when there are indications of trouble, mischaracterise the risk investors in funds face and the potential spillover those loans can have if they go bad.

“I think there’s risks that can build up inside of this private funds world,” Gary Gensler, chair of the Securities and Exchange Commission, said in an interview. “They are risks that I’ve witnessed personally, like during the Long-Term Capital Management spillovers in 1998.”

Private loans by their very nature rarely trade. That means fund managers do not have market data to rely on for objective valuations.  

Column chart of Assets under management ($tn) showing Investors have never had more capital tied up in private markets

Instead they must draw on their own understanding of the value of the business, as well as from third-party valuation providers such as Houlihan Lokey and Kroll. They also can see how rivals are marking the debt in securities filings. 

The funds share details of each individual business’s financial performance with its valuation provider, which then marks the debt. The fund’s board and audit committee ultimately sign off on those valuations.

“Marks are not scientific,” one Pluralsight lender said. “Everyone’s view of valuation can be different based on a host of assumptions they have, and until you have to liquidate a position that mark is a function of . . . all the analytics you used.”

Some of Wall Street’s most prominent figures have raised concerns about the rise of private credit firms, which now lend to millions of consumers and a broad subset of businesses around the globe. JPMorgan Chase chief executive Jamie Dimon has emerged as one such open sceptic.

“Some of these things are not marked to market with the same discipline that we do,” he said in May.

The loans to Pluralsight were extended in 2021, as part of Vista Equity Partners’ $3.5bn buyout of the company. It was a novel loan, based not on Pluralsight’s cash flows or earnings, but how fast its revenue was growing. Regulated banks are unable to provide this type of credit, which is deemed too risky. A who’s who of private credit lenders — including Blue Owl, Ares Management and Golub Capital — stepped in to fill the void.

The seven lenders to Pluralsight who report their marks publicly disclosed a broad range of valuations for the debt, with a Financial Times analysis showing the gulf widened as the company ran into trouble over the past year. The firms disclose the marks to US securities regulators within their publicly traded funds, known as BDCs, which offers a window into how their private funds may be valuing the debt.

Ares and Blue Owl marked the debt down to 84.9 cents and 83.5 cents on the dollar, respectively, as of the end of March. Golub had valued the loan just below par, at 97 cents on the dollar. The other four lenders, Benefit Street Partners, BlackRock, Goldman Sachs and Oaktree, marked within that range.

Line chart of Fair value of Pluralsight's term loan, maturing in April 2027 (cents on the dollar) showing How much is Pluralsight's debt worth? Funds take different views

“It’s an unbelievable issue,” one lender to Vista said. “There are a lot of discrepancies . . . and it’s prevalent across many of these books . . . It’s a bigger issue than Pluralsight.”

In the lead-up to the negotiations between Vista and its lenders, a number of creditors began to write down the loan. The problems were clear. Pluralsight, which makes educational videos to help train software developers, had been hit hard by lay-offs in the tech sector. 

Revenue started to fall last year. Vista ultimately agreed to inject more capital into the business so that Pluralsight did not breach covenants in its loan package.

That prompted several lenders to put the company’s $1.7bn debt on their so-called watch lists — the group of loans that need to be monitored more intensely because of the risk the borrower may have trouble repaying. 

“I would certainly question how anyone would be close to par context on March 31,” one person involved in the negotiations said. 

The most recent public marks came before Vista shuffled assets within Pluralsight, setting off fireworks with creditors (several alleged Vista improperly valued the assets it moved to a subsidiary, three people involved in the matter said. A person familiar with the company said the valuation was done by a third-party firm in an “arms-length process”). While the move did not strip assets from creditors, it gave Vista first priority to be repaid on the extra capital it was putting into the business, money that was used to make an interest payment to the lenders.

The most conservative mark implies a loss across the lenders of nearly $280mn on the $1.7bn debt package. But Golub’s mark would imply a loss of just $50mn for the private lenders.

Some lenders have marked the loan down further since May, people familiar with the matter said.

Vista, for its part, started marking down its valuation of Pluralsight in 2022, cutting it to zero this year. Vista is expected to hand the keys to the business to the lenders in the coming weeks, with one person noting the two sides had made progress in recent talks. 

“The main goal is preserving value to investors and providing a path to a cleaned-up balance sheet,” one lender said. “The business is wounded, [but] it’s not dead . . . We’re not walking away.”

Ares, Benefit Street, BlackRock, Blue Owl, Goldman, Oaktree, Pluralsight and Vista declined to comment.

The discrepancy between marks poses a problem for investors, who could be left in the dark or potentially misled if a lender or buyout firm has been overly optimistic about its portfolio.

A publicly traded loan that changes hands below 80 cents on the dollar typically implies meaningful stress, a cue to investors of trouble. But as Pluralsight illustrated, that kind of mark never materialised until it became clear Vista might lose the business.

“That’s one of the risks to consider: there’s an information gap, where you can see the mark, but you can’t actually see through to the financials of the company to understand the credit performance,” said Clay Montgomery, vice-president of Moody’s private credit team.

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