2018 in review: Big funds split the market

Despite lower headline numbers, 2018 was a strong fundraising year, with investors increasingly moving towards the biggest funds.

After the bumper fundraising year of 2017, the past 12 months have seen a little less capital raised, though there remains a strong appetite among LPs.

However, what we have seen in 2018 is the continuing rise of mega-funds raising multiple billions, including a $10 billion mezzanine fund from Goldman Sachs. The rise of mega-funds in the debt space has also fed into new deployment trends.

“The big development in 2018 is we’ve seen a true divergence between the upper and lower mid-market,” says Klaus Petersen, founding partner at Apera Capital.

“Back in 2012 when this market really started in Europe, we saw vehicles of €500 million to €800 million in size, all active in the lower mid-market. That has changed and accelerated in the last year and we now see vehicles of €5 billion or more.”

It is perhaps inevitable that larger funds will lead to larger deals. Trying to invest a €5 billion fund in lower mid-market companies could require up to 100 deals, adding substantial pressure to deal origination and structuring resources.

Ted Goldthorpe, partner at BC Partners Credit, also notes a similar trend occurring in the US market, saying: “The definition of mid-market seems to expand every year, we now see BDCs investing in firms with average EBITDA of $80 million.”

He also notes that rising fund and loan sizes are shifting the competitive dynamic: “The market is really maturing now and we see the credit funds going head to head with the big banks on deals today.”

Richard von Gusovius, partner at placement agent Campbell Lutyens, says: “We’re seeing fewer managers raising larger funds. There is a flight to quality among investors who want to invest in big platforms that can serve their needs for a lower cost.”

Von Gusovius notes that broader fundraising trends in the market indicate a greater focus on distressed funds as world markets enter a more volatile phase and the credit cycle begins to turn. He has also observes investors are more sceptical of unitranche funds, but that we’re also unlikely to see the return of widespread mezzanine use in Europe.

Fund managers also acknowledge that fundraising volumes are lower but point to increased interest from LPs in Asia which has mitigated the impact of local players allocating less to the asset class.

Howard Sharp, partner at Park Square Capital, says: “We have continued to see strong levels of capital flowing into direct lending over the year, and although there have been some signs of allocations being smaller in 2018 versus 2017, this is offset by the wave of new supply coming across from Asia looking to be deployed in Europe.”

Figures from the Alternative Credit Council’s Financing the Economy 2018 report show more investors are planning to increase their exposure to private debt than are planning to reduce allocations, indicating there is likely to be continued room for new fundraisings for the foreseeable future.

It is also thought that market fundamentals are likely to be positive for private credit fundraising activity in the years to come due to its appealing blend of fixed-income risk/return profiles with an illiquidity premium.

Jens Ernberg and Thomas Hall, co-heads of private credit at Capital Dynamics, note: “We think the appeal of private credit to investors, in terms of predictable income, low volatility, protection against rising rates, and lack of correlation to other assets classes will support growing allocations over time.

“We also think that SMAs are becoming a more common way for investors to access private credit investments and those numbers are not necessarily factored into the overall fundraising data, resulting in market estimates underrepresenting actual funds raised.”