Private-credit managers turn to selling as direct lending halves

U.S. direct lending volume is running at less than half its first-quarter pace. The slowdown has moved from the origination desk to the sale side. In August, Palmer Square, a CLO and private-credit manager, is exploring a sale while weighing organic and inorganic growth options, according to Creditflux. BlackRock TCP Capital Corp. announced on August 1 that it sold nearly half its BDC portfolio to a continuation vehicle.

The two moves are different in form. Palmer Square would sell a management company; BlackRock TCP has sold a loan book. The common thread is that both managers are converting existing assets into cash at a moment when the pipeline for new loans has been cut by more than half. Direct lending's growth phase has paused, and the existing book is where managers can still raise money.

The credit backdrop does not look like the driver. BDC Reporter's Q2 scorecards, which cover Hercules Capital and Ares Capital, call Hercules an early-season standout. The August coverage of the two transactions does not describe credit losses or forced sales. The trigger appears to be the origination drought, not problems with the loans already on the books.

Creditflux reported on August 14 that Palmer Square is talking to potential buyers while considering organic and inorganic growth paths. The firm runs collateralized loan obligations and private-credit strategies, so a sale would value the entire franchise. The process is early; the reporting does not include a price or a signed mandate.

The two options side by side—sale and growth—say something about the firm's position. Managers facing distress do not usually negotiate a sale and a growth investment in the same conversation. The dual track suggests the firm believes its platform has worth that the market has not yet assigned. At a time when the direct-lending pipeline has been cut in half, the value of an existing platform becomes more visible.

BlackRock TCP is further along. The BDC announced on August 1 that it sold nearly half its portfolio to a continuation vehicle. The coverage states that the sale cuts the company's income base and raises the odds that the remainder will be sold. The transaction leaves the BDC with roughly half its previous loan book.

The sale takes the loans off the BDC's balance sheet. A continuation vehicle is the buyer, and the BDC holds cash in their place. The result is a smaller book of earning assets, matching the coverage's statement that the income base has been cut.

If the remaining portfolio is sold, the BDC would shrink again. The coverage treats that outcome as possible, though not certain. A second sale would leave the company with a fraction of its original book and a big question about its future structure.

The pattern is coherent, even if the two transactions are different in kind. Direct lending's long expansion left most managers with no reason to test the exit market. A drop below half the first-quarter pace changes that. Palmer Square is testing what a CLO platform is worth; BlackRock TCP has put a market price on half a BDC's loans. Other firms are watching to see if either path becomes a standard move. For allocators, the practical effect is a new route to liquidity in a market where new commitments are drying up.