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NEW YORK, March 23 (Reuters Breakingviews) – When Thoma Bravo agreed to acquire enterprise software company Anaplan (PLAN.N) for $10.7 billion, he had to find comfortable lenders to finance a business with no real operating cash flow history. Wall Street banks are struggling to fill that role, so Thoma Bravo turned to direct lenders, including the credit arms of Blackstone (BX.N) and Apollo Global Management (APO.N). These companies are playing aggressively to overthrow traditional lenders. It sounds like a tech start-up model mixed with the mindset of a venture capitalist – with the risk that that entails.

Direct lenders began to replenish their coffers several years ago, opportunistically, when banks were forced to manage bad debts from the financial crisis. They raised tons of money and now have huge war chests. Apollo has some $350 billion in its credit business, some of which is dedicated to these loans.

The big banks have always had a fairly conservative way of financing leveraged buyouts. They deliver cash based on a multiple of EBITDA. The higher the multiple, the riskier the trade. The problem is that Anaplan has a habit of accounting for operating losses. Despite this, private equity still wants to buy it.

Many public companies like Anaplan are seeing their valuations plummet amid the recent stock market turmoil, opening up the possibility for more of them to go private. So direct lenders also see an opportunity. If they can step in where the banks are nervous, they can not only gain market share, but show the benefits of using a direct lender, which is more nimble. When Thoma Bravo comes around for another deal, he might be open to going back to a direct lender if he’s had a good experience.

It sounds a lot like what start-ups do when they try to disrupt a market. And like a venture capital firm, lenders will have a pipeline of deals, so if one goes sideways, strong returns on the others can offset that.

The problem is that venture capitalists take risky bets on stocks, and when stock investments do well, they return a lot more. Debt yields are not as volatile, which is one of the reasons banks are more conservative. But lending based on revenue growth rather than earnings comes with risks. And over time, buyers looking for ever-increasing acquisition targets may find themselves looking for even riskier, lower-quality companies. Like many tech start-ups, a high-growth story may look good at first, but it can go downhill in the end.

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BACKGROUND NEWS

– Private equity firm Thoma Bravo said on March 21 that it had agreed to acquire enterprise software company Anaplan in a $10.7 billion deal. The sponsor turned to direct lenders Owl Rock Capital and Golub Capital, as well as the credit arms of Blackstone and Apollo Global Management.

– The group of direct lenders provided $2.5 billion in funding for the deal, structured as a unitranche loan, according to Bloomberg.

Editing by Lauren Silva Laughlin and Pranav Kiran