Private Credit’s Rising Role in Refinancing and Scaling PE-Backed Businesses

The private credit market has emerged as a cornerstone of modern capital markets, reshaping how private equity (PE)-backed businesses are financed, restructured, and scaled. With assets under management (AUM) nearing $2 trillion in 2024, private credit is no longer a niche alternative but a dominant force in addressing the liquidity and capital needs of PE-backed portfolios [1]. This evolution is vividly illustrated by the recent $4 billion private credit deal for Leaf Home, a residential services company owned by Gridiron Capital. The transaction, led by Ares Management Corp. and Apollo Global Management Inc., underscores how private credit is innovating capital structures to extend holding periods, optimize returns, and navigate a low-M&A environment.

The Leaf Home Deal: A Case Study in Capital Structure Innovation

Leaf Home’s $4 billion refinancing and acquisition of Erie Home involved a hybrid structure combining $1.9 billion in preferred equity from Ares and co-investors with a $2 billion debt package from Apollo [2]. This approach reflects a strategic shift in private credit: the use of preferred equity to provide downside protection while allowing PE sponsors to retain control and flexibility. Unlike traditional debt, preferred equity often includes dividend rights and conversion features, enabling sponsors to manage cash flows without triggering covenant defaults. For Leaf Home, this structure not only refinanced existing liabilities but also funded growth through the Erie Home acquisition, demonstrating how private credit can serve dual purposes of deleveraging and scaling [3].

Apollo’s role in the debt component further highlights the firm’s broader strategy of deploying capital from its insurance business into high-impact infrastructure and technology projects. This aligns with a trend where private credit managers are leveraging balance sheets and partnerships to offer tailored financing solutions. For instance, Apollo’s earlier $29 billion bid for Meta’s AI data center in Louisiana and its $11 billion Intel facility financing in Ireland showcase a pattern of targeting capital-intensive sectors with long-term cash flow visibility [4].

Broader Trends: Competition, Hybrid Models, and Regulatory Shifts

The Leaf Home deal is emblematic of a larger industry-wide shift toward hybrid financing models. As traditional bank lending tightens and public markets remain volatile, private credit firms are innovating with structures such as subscription facilities, NAV-linked loans, and continuation vehicles. These tools allow PE sponsors to manage liquidity without diluting ownership or triggering forced exits. For example, in the U.S., subscription facilities have normalized pricing, while in France, NAV financings are gaining traction to support follow-on investments [5].

Competition in the private credit space is intensifying, with firms like Ares and Apollo vying for dominance in sectors ranging from residential services to digital infrastructure. Strategic partnerships are becoming critical. Ares’ $5 billion debt package for Clearlake Capital Group’s acquisition of Dun & Bradstreet earlier this year exemplifies how private credit is expanding into traditional corporate finance territory [6]. Meanwhile, Apollo’s acquisition of Stream Data Centers underscores its pivot toward AI-driven infrastructure, a sector where private credit’s flexibility can unlock value through tailored capital structures [7].

Regulatory scrutiny is also reshaping the landscape. In Europe, the AIFMD 2.0 directive is pushing for greater transparency, while U.S. and UK regulators are scrutinizing systemic risks. These developments are likely to standardize practices and attract institutional investors seeking higher yields in a low-interest-rate environment [8].

Strategic Implications for PE-Backed Businesses

In a low-M&A environment, private credit’s ability to extend holding periods is a game-changer. By providing long-dated capital and flexible terms, private credit allows PE sponsors to refine operations, invest in growth, and avoid premature exits. This is particularly valuable in sectors like residential services, where market consolidation is slow but demand for specialized services is rising. The Leaf Home deal, for instance, enables Gridiron Capital to focus on operational improvements and geographic expansion without the pressure of a near-term sale [9].

Moreover, private credit’s role in enhancing returns is evident in its capacity to replace high-cost debt with lower-cost, structured financing. Apollo’s debt package for Leaf Home, for example, likely includes floating-rate terms that align with current interest rate environments, reducing refinancing risks. Such structures also allow sponsors to return capital to investors through dividends or share repurchases, a critical consideration in a market where liquidity is scarce [10].

Conclusion: The Future of Private Credit

As private credit continues to mature, its integration into the capital stack of PE-backed businesses will deepen. The Leaf Home deal is a microcosm of this trend, illustrating how preferred equity and hybrid financing can transform capital structures. With AUM projected to surpass $2.5 trillion by 2025 and regulatory frameworks evolving to accommodate its growth, private credit is poised to become the default solution for PE sponsors seeking to navigate a complex capital landscape. For investors, this means opportunities to access high-yielding, non-correlated assets while supporting innovation in sectors from residential services to AI infrastructure.

Source:
[1] Dechert. Top Private Credit Trends and Outlook for 2025 [https://www.dechert.com/about/dechert-year-in-review/private-credit-highlights-and-outlook.html]
[2] Bloomberg Law. Apollo, Ares Provide $4 Billion Private Credit Deal to Leaf Home [https://news.bloomberglaw.com/bankruptcy-law/apollo-ares-provide-4-billion-private-credit-deal-to-leaf-home]
[3] McKinsey & Company. The Next Era of Private Credit [https://www.mckinsey.com/industries/private-capital/our-insights/the-next-era-of-private-credit]
[4] Economic Times. How Pimco Outmaneuvered Apollo, KKR to Win $29 Billion Meta Deal [https://m.economictimes.com/tech/technology/how-pimco-outmaneuvered-apollo-kkr-to-win-29-billion-meta-deal/articleshow/123389431.cms]
[5] Goodwin. Fund Finance: 2024 Reflections and Looking Ahead to 2025 [https://www.goodwinlaw.com/en/insights/publications/2025/02/alerts-privateequity-fund-finance-2024-reflections-and-looking-ahead]
[6] Financial Post. Apollo, Ares Provide $4 Billion Private Credit Deal to Leaf Home [https://financialpost.com/category/pmn/]
[7] Bloomberg Law. Apollo, Ares Provide $4 Billion Private Credit Deal to Leaf Home [https://news.bloomberglaw.com/bankruptcy-law/apollo-ares-provide-4-billion-private-credit-deal-to-leaf-home]
[8] PwC. Private Credit: Rewiring Credit in Capital Markets [https://www.pwc.com/us/en/industries/financial-services/library/private-credit.html]
[9] McKinsey & Company. Global Private Markets Report 2025 [https://www.mckinsey.com/industries/private-capital/our-insights/global-private-markets-report]
[10] Cambridge Associates. Private Credit Markets Are Growing in Size and Opportunity [https://www.cambridgeassociates.com/insight/private-credit-markets-are-growing-in-size-and-opportunity/]