Pluralsight – a big test for private credit

Investors have been ploughing billions into private credit[1] in recent years, enticed by the possibility of juicier yields, the asset class’s track record through the pandemic and potential diversification benefits. Private debt assets under management more than doubled from $825bn at the end of 2019 to $1.74bn at the end of 2023[2].

This momentum, however, suffered a setback in recent months, when the Pluralsight loan restructuring was reported in financial press. This story attracted a lot of attention, not least because the creditors included some of the world’s largest private credit managers.

Here is a high-level summary of what happened:

• Vista Equity Partners purchased Pluralsight, a software company providing online professional technology training, for $3.5bn in 2021[3], during a period when software companies were fetching high valuations.
• The acquisition was funded with over $1.5bn of debt financed by private credit lenders instead of banks[4].
• Since being taken private, Pluralsight has reportedly struggled as it faced increased competition in the EdTech space and weakening demand from its main client base.
• Rising interest rates have meant that it became increasingly unsustainable to service the debt-heavy balance sheet.
• After months of negotiation, Vista marked down its equity holding in Pluralsight to zero over this past summer. As a result, the lenders took ownership of Pluralsight, wrote down the debt by $1.3bn and agreed to inject new capital into the business[5].

The group of creditors are Blue Owl Capital, Ares, Goldman Sachs, Franklin Benefit Street Partners, BlackRock, Oaktree and Golub. The loans were made across both funds and Business Development Companies (BDCs)[6]. Reports suggest this cohort has known about Pluralsight’s financial troubles since 2023, yet the rising credit risk was not fully reflected in loan valuation until Q2 2024, when all lenders marked down the Pluralsight loan to 45-50% of its original value. In our view, the delayed mark-to-market is symptomatic of the lack of transparency and consistency in private loan valuation.

What has been the impact on the funds and BDCs that invested in Pluralsight? The answer, as far as we can tell based on available data, is it’s been modest. BDCs are required to disclose their financial performance so we used their latest quarterly reports to estimate the impact of the Pluralsight restructuring on the investment vehicles that participated in the loan. Our analysis suggests exposure to Pluralsight accounted for between 0.5% and 1.5% of assets for the affected BDCs.[7] BDCs are generally well-diversified with limits on maximum single-name exposure, and this has, according to our research, shielded investors from greater losses.

So, what has the Pluralsight saga taught us? Firstly, portfolio diversification has the potential to be effective in minimising losses when things go wrong. Secondly, the paramount importance of robust underwriting and proactive monitoring and engagement with borrowers. While we expect the private credit market will survive this test, it has highlighted the opaqueness and riskiness of the asset class.   

 

Key risks:

It should be noted that diversification is no guarantee against a loss in a declining market. Stress testing may not fully eliminate the risk of investment loss.

[1] In this blog we are specifically referring to the sub-investment grade part of the private credit market, dominated by direct lending.

[2] Source: Preqin

[3] Source: Pluralsight, December 2020

[4] Source: Financial Times

[5] Source: Financial Times

[6] BDCs are registered with the SEC and provide investors with more liquidity than a traditional close-ended fund. Both retail and institutional investors can invest in BDCs. By the end of 2023 BDC AUM reached $315bn (source: LSTA).  

[7] Source: LGIM estimate, based on latest filings.