January 28, 2020 / 10:47 AM / a month ago

Direct lending fundraising drops as market fears mount

NEW YORK, Jan 28 (LPC) - A decline in private credit fundraising in the last year has highlighted the caution market participants are exercising ahead of what could be a looming market downturn.

Last year private credit funds raised US$107bn, the lowest since 2015, according to data from research firm Preqin. The figures for 2019 were 11% down on the US$120bn recorded for 2018 and 19% down on the US$132bn record raised in 2017.

After years of explosive growth aided by low interest rates and appetite hunt for yield, participants in the private credit market are now putting the brakes on.

“We have not seen the last of private credit. In the future we’ll break 2017 numbers. Investors have picked the managers they want to work and re-upping with them, but not too aggressively at this stage of the credit cycle,” said Jess Larsen, a partner at First Avenue, a placement agent.

“Many of the large investors want to reduce their general partner relationships, so I’m not surprised we’re having a small correction,” Larsen said.

Even with headline figures falling for closed-ended funds, the rapid expansion of separately managed accounts means much of the capital going into the market is harder to track.

The growth of money outside such traditionally closed-ended funds is a reflection of the more creative ways investors are allocating the private credit market.

GSO/Blackstone raised US$2.7bn for its private BDC, according to a November Securities and Exchange Commission filing.

Aflac, an insurance company, took a minority stake in Varagon this month and replenished its loan firepower with a US$3bn commitment, according to a press statement issued earlier this month.

BIGGER NAMES, LARGER SHARE

Such trends in capital allocation also highlight that a division is taking the place in the market and that the bigger names in operation are taking a larger share of investor interest.

“Firms that have scale, strong PE relationships and broader capabilities are seeing the vast majority of the higher quality investment opportunities today,” said Ken Kencel, chief executive officer and president at Churchill Asset Management.

“It’s a virtuous circle, where those that operate with scale and relationships get the calls on the most attractive new financing opportunities and are also the firms that are actively fundraising,” Kencel added.

In the last month, Nuveen announced it would fold its junior debt and equity investment strategies into the Churchill name, creating a US$21bn credit platform.

“This dynamic will continue – larger managers are raising more and more capital and smaller players will increasingly find it difficult to compete,” Kencel said. (Editing by Michelle Sierra and Christopher Mangham)

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