Direct lending has enjoyed more than 10 years of bull market. Money has poured in from LPs in search of yield for relatively low risk, with managers growing from fund I to fund II and III, expanding their regional capabilities and diversifying the instruments they offer. There have been some hiccups, but the industry has largely sailed through the last decade, with warning signs confined to the distant horizon.

Unitranche – the single tranche blend of senior and junior debt – became two-tranched in what is now widely called a first out, last out (FOLO) structure, leaving funds in a senior position behind a bank piece, in a super senior position.

Many managers became levered themselves, with the use of fund leverage growing to around 50% of the market.

Documentation, pricing and leverage have changed considerably. Direct lenders no longer revel in a position of significant strength over the syndicated markets in respect of lenders’ rights. A leverage covenant is still mostly prevalent, if lofty, but EBITDA addbacks, cash leakage, and many other large-cap market features have filtered into the mid-market.

Fundraising tumbled as investors became more cautious and travel restrictions hampered fundraising plans. Managers raised €8.8 billion in the first quarter compared to €11.8 billion in the same period in 2019.

But, as in every crisis, there will be winners as well as losers. Some funds will emerge stronger; others won’t be so lucky. With banks shutting their underwriting capability, private debt becomes the go-to venue to raise financing for deals, which may give rise to a great many opportunities.

But all of this is being put to the test. The COVID-19 pandemic has caused economies to shut down as governments try to impede the virus’s spread. With portfolio companies turning off the revenue tap, many managers have found themselves effectively operating in emergency mode. Primary activity has dried up, and their attention has turned to liquidity needs and covenant negotiations.

Some levered private debt funds have found themselves at the mercy of their leverage facility providers as restrictions on their ability to offer flexibility to portfolio companies in trouble came to bite them.