The way private equity sponsors finance their deals has evolved dramatically over the last generation, Patrick Ryan said on this week’s Drinks With The Deal podcast.

The $11.3 billion buyout of SunGard Data Systems Inc. in 2005 was a watershed in the bank finance market, said Ryan, the head of the global banking and credit practice at Simpson Thacher & Bartlett LLP. Seven sponsors teamed up on the deal, which meant that each was able to see the terms the others got on their debt, leading over time to greater standardization in the documents.

The deal was also signed before the sponsors had gotten financing for the deal, which forced sponsors to focus more on the need for deal certainty. “For a long time,” Ryan said, “the dialogue had come out of the banks,” but after SunGard, “you started to see a dialogue driven by borrowers’ needs.”

Financing certainty has also been central to the rise of direct lenders since the Great Financial Crisis of 2008. “Private credit offers more certainty at a higher price as compared to a syndicated deal, and that’s generalizing,” Ryan said. Direct lenders “tend to focus more on individual credits. They’re not ratings-based, they’re not portfolio investors. They will have tighter covenants generally, the debt is generally not widely syndicated, and they offer greater confidentiality.”

But, Ryan said: “Banks are always going to be a major part of the market. “They’re starting to think about providing credit that more closely resembles what private credit looks like. Over time these two universes will exist side by side, and one might expect that they will converge over time.”

Here’s the podcast with Patrick Ryan:

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