Banks are currently managing about $100 billion in debt related to leveraged buyouts, with three-quarters of this amount underwritten recently and in the process of being sold to investors. An additional $15 billion in new junk bonds and loans tied to M&A deals is anticipated to launch after the Labor Day holiday in the US, indicating a strong start to the year for dealmaking, which is forecast to be a record year.
This surge in LBO debt is a welcome development for debt bankers, who have been awaiting a rebound in M&A activity and the lucrative financing opportunities it presents. The anticipated $15 billion wave, specifically, is being prepared by Wall Street banks to attract yield-hungry investors.
However, this return of M&A activity and associated debt issuance occurs amidst a complex landscape for private markets. Private equity firms and debt funds were sitting on a substantial $631.8 billion in unspent capital raised between 2020 and 2022 as of September, with the total across all private capital types reaching $1.28 trillion. This suggests a struggle for these funds to deploy their capital, potentially leading to challenges in finding suitable investments for the new debt.
Separately, the technology sector, particularly software portfolios in private equity, faces a "capital reset." The rise of AI has led to a repricing of software companies, coinciding with a large wave of technology buyout debt, around $257 billion from 2021-2023, approaching its refinancing window in 2028 and 2029. Lenders are now requiring significant premiums for software loans, trading at spreads of roughly 300 basis points wide of the leveraged loan index, due to concerns about long-term enterprise value and the impact of AI on business models. This dynamic complicates the landscape for new and existing buyout debt.
