Sourcing private credit opportunities in evolving markets

Key takeaways

1. A private credit manager’s sourcing capabilities are crucial for finding new and differentiated opportunities.
2. Casting a wide net by sourcing private credit opportunities from both private equity sponsors and non-sponsor opportunities is optimal for driving deal flow across market environments. This ensures a private credit manager can find new opportunities regardless of private equity activity and the M&A environment.
3. All-time-high private equity dry powder means private equity sponsors have a substantial amount of capital ready to deploy. This coupled with private equity manager’s aging portfolio positions available for exits can serve as a potential catalyst for a private equity sponsor activity rebound in 2025.

A recovering M&A market

Since base rates began increasing in 2022, a higher cost-of-capital environment has dampened the merger and acquisition (M&A) activity that often drives new investment opportunities in private credit. In 2021, during the height of the M&A bull market, nearly 21,000 total deals were completed with a total value of $2.7 trillion.¹ Total deal count and values have declined each year since then, and accounted for just over 13,500 total deals at a value of $1.6 trillion in 2024.¹ As highlighted in the exhibit below, private equity activity also dropped from 2021-2024. This reduced activity has left a gap where private credit lenders typically source deals.

A series of rate cuts in 2024, coupled with greater optimism over growth and the potential for an easing regulatory environment has led to an anticipated recovery in M&A deal activity in 2025. In light of these evolving market conditions, it is important for private credit investors to consider: 1) The process for sourcing private credit deals, 2) What makes for a resilient investment pipeline across cycles, and 3) Where is deal activity headed in 2025.

Exhibit 1: Announced Global Sponsor-related M&A

Origination

The deal origination process begins when private credit investment teams evaluate their platform’s deal flow. An initial screening of opportunities seeks to identify investments which may offer attractive outcomes based on the requirements of the investment team. Having an investment team with expertise through specific industry focuses (as opposed to being a generalist) can allow for more efficient execution of each transaction.

BlackRock has built a strong foundation of industry relationships in the US direct lending market over more than 24 years of investing in middle market companies. Casting a wide net for deal opportunities among a variety of sources ensures we are evaluating differentiated opportunities. Our rigorous investment evaluation process has resulted in a high degree of selectivity, having reviewed 440 new potential portfolio companies (662 total opportunities inclusive of add-ons/refinancings of existing portfolio companies) and investing in 18 of those new companies over the last 12 months, for a selection rate of just 4%.² In addition to each member of our US Direct Lending investment team sourcing potential opportunities, the BlackRock Capital Markets group leverages a proprietary network of global relationships with banks, financial sponsors, and companies to help identify differentiated investment opportunities in the private markets.

Building a resilient investment pipeline

Macroeconomic events such as inflation, rising interest rates and now tariffs have caused uncertainty for company management teams, and thus slowed deal activity across private markets in recent years. This raises the question of what is the most optimal way to source new opportunities in a slower M&A environment? Within private credit, we focus on identifying opportunities from sponsors and non-sponsor sources:

• Sponsor sourced deal flow - Traditionally, a substantial source of deal flow in private credit comes from financial sponsors. These are private equity firms that manage an investment fund and are looking to finance the acquisition of a business. The acquisition is typically financed using debt which is also known as a leveraged buyout (“LBO”). For most middle market companies, a private credit lender will finance these transactions.
• Non-sponsor sourced deal flow - Less traditionally, there is also non-sponsor deal flow which includes sourcing opportunities directly from owners of companies and company management teams. This can also include investment banks, senior lenders in the industry, accountants, board members of former clients, former colleagues, restructuring firms, attorneys, and investment professionals across private credit. In the non-sponsor channel, a private credit manager’s industry reputation, tenure, and breadth of relationships is of the utmost importance and necessary for maintaining deal flow.

In our view, a channel-agnostic approach to sourcing private credit opportunities allows us to build a resilient and scalable pipeline. Sourcing from both sponsor and non-sponsor opportunities promotes consistent deal flow regardless of private equity market activity. Lending in the industry for 24 years has cultivated relationships that allow us to evaluate a wide range of opportunities. In 2024, our US Direct Lending team invested in 55 deals, of which 67% were transactions done with existing portfolio companies.³ As illustrated in Exhibit 2, in more challenging market environments when private equity activity is muted, having an established non-sponsor channel and an extensive list of repeat borrowers is a recipe for sourcing deals even in an imperfect market.

Exhibit 2: Private credit opportunity set across market cycles

Recovering in 2025

After several years of declining M&A and private equity sponsor activity, the outlook for activity in 2025 is improving. In recent years, private equity has experienced a decrease in number of exits (e.g. acquisitions, IPOs, etc.) relative to new investments, leading to aging positions in their portfolios. With private equity funds eager to exit these positions and ready to deploy new capital near all-time highs, we expect that there will be ample opportunities to source new deals in private credit. A lower cost of capital and management teams with a more confident outlook on the economy would also support a rebound in deal activity across both sponsor and non-sponsor private credit opportunities in 2025.

Exhibit 3: U.S. private equity dry powder by vintage

Exhibit 4: U.S. private equity-backed company inventory by deal year

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