Conference Presentation, Panel
Aging Societies: Opportunities amid Challenges | Global Conference 2025
Milken InstituteManeet Ahuja, Cynthia Hardy Maasry, Ted Koenig, Timothy Lyne, Andrew Milgram, Cynthia Masry, Tim Line
- Expectations for 2025 M&A activity have been revised downward from previous "unbelievable" projections due to current economic conditions, with significant market activity anticipated to resume in 2026 and 2027.
- Direct lending volume is projected to remain low or tepid for the next six to nine months, with a forecasted significant recovery in volume during 2026 and 2027 driven by an anticipated wave of exits from companies purchased in 2021 and 2022.
- The market is experiencing a pause in transaction pipelines, particularly in the second quarter, leading to concerns regarding third-quarter results and a broader trend of companies being put on hold due to global uncertainty and U.S. economic perceptions.
- Many portfolio CEOs are prioritizing cash retention over capital expenditures or add-on acquisitions due to fears of an imminent recession, with 16% of companies in one portfolio now on a watch list.
- Andrew Milgram forecasts a technical recession with a negative second-quarter print, stagnant post-Liberation Day economic conditions, and a sharp deterioration in credit quality that will impact investor returns.
- EBITDA in the middle market is declining rapidly with debt service coverage ratios dropping, where 25% of a specific dataset shows ratios below one times, leaving most companies deeply troubled.
- Business bankruptcies are predicted to remain at 14-year highs, driving a reallocation of value from equity to credit and necessitating substantive retooling and financial restructuring for companies facing genuine operating issues.
- Lenders are expected to transition into owners for large portions of their portfolios as sponsors struggle to provide capital, while banks are predicted to reenter the commercial and industrial lending market.
- Transaction prices for distressed assets are falling, with offers starting at 60 cents compared to historical 80 cents, creating buying opportunities for lenders willing to exit wholesale from specific companies.
- Debt-to-equity conversions are increasing, shifting from a couple per year previously to eight or nine this year, reflecting the need to rework ownership structures.
- Large players in the upper middle market are gravitating toward the middle market due to a dried-up supply of deals in the upper tier, a trend expected to reverse as deal availability recovers.
- Capital raising is concentrating among the top 20 general partners, with 70% of capital raised in the last year going to these entities, signaling a flight to safety and increased dispersion in manager performance.
- Private credit is expected to continue outperforming private equity in annualized cumulative returns from Q1 2022 through 2024, with private equity holding periods extending to eight to ten years.
- Private credit allocations are forecasted to increase as investors seek downside protection and uncorrelated returns, while allocations may shift from private equity to private credit as PE firms struggle to exit holdings.
- The credit secondaries market is predicted to grow at more than 20% annually for the next few years.
- Recovery rates for middle market loans remain historically high at 80% to 85%, whereas recovery rates in Europe are expected to be significantly lower due to a lack of market depth.
- There is a systemic risk regarding the lack of workout teams and restructuring experience within many lending firms as the environment necessitates more complex financial reworkings.
- Elevated interest rates are currently the primary driver of debt service coverage concerns, though major revenue declines are not yet observed but are expected to occur in the event of a recession.
- International investors have expressed reluctance to invest in the U.S. following tariff announcements, a trend that could negatively impact fundraising efforts.
- Market participants anticipate that private credit managers will see increased dispersion in returns, with historical data showing median IRRs of 9%, top decile at 15%, and bottom decile at 2%.