Annual review 2017: What we learned

Bigger funds, niche strategies and friendlier banks were just a few of the trends to emerge over the last 12 months.

1. More capital is going into fewer hands

One of the most significant takeaways from our annual fundraising report is that more capital is being raised by fewer funds.As the private debt market matures, investors are gravitating towards managers able to demonstrate a track record, can leverage immense scale and have a global footprint. Over a third of the capital raised in 2017 was gathered by just 10 managers. Apollo’s hybrid debt and equity fund was the largest vehicle, raising

$24.7 billion; Oaktree raised the largest pure debt vehicle with an $8.9 billion final close for Opportunities Fund Xb.

Beyond fundraising, we have also seen consolidation at the manager level.A high- profile example came in early 2017 when Ares completed its acquisition of American Capital.The deal has put Ares on course to hold even larger positions and write even bigger cheques.

2. Niche strategies are on the rise

As more capital is funnelled towards the large and increasingly powerful global funds, smaller managers are having to differentiate by specialising in specific sectors or strategies.

“There are the dealflow players, such as Ares, Alcentra and ICG, which have the geographic coverage, track record and resources that act as a multiplier effect, and they can easily raise money and deploy it,” said Luke McDougall, partner, corporate department, Paul Hastings, in our November Europe roundtable.

“Then you have the boutiques, which can only operate in certain sectors, such as technology and software, where they have an advantage over the dealflow players.”

The kind of investments smaller private debt managers are exploring include sec- tor-focused strategies where managers can leverage specific expertise.There are also more exotic offerings, such as venture debt and asset-based lending, in which managers hope to generate higher returns than plain vanilla direct lending. More managers are also looking to do more non-sponsored SME financing in specific jurisdictions, like Germany, where knowledge of local mar- kets and regulations can give local managers an advantage.

3. Discipline is getting harder

One of the things that managers and investors alike have stressed repeatedly in 2017 is the “need for discipline”. While fund- raising data reveal plenty of demand, that money still needs to get deployed.

“There is not a direct correlation between capital raised and investment opportunity,” said Cyril Tergiman, a partner at EQT Credit in November. “In 2008, the investment opportunity was great, but you couldn’t get capital from investors. Now you can get the capital, but can you spend it wisely?You need to stay disciplined and rigorous on sourcing, stay disciplined on risk and relative value, and fight for the deals you believe in. I sense there is a degree of discipline slippage in risk management.”

While increased competition for fewer opportunities can impact due diligence, deal terms are also loosening. On both sides of the Atlantic there have been reports of more covenant-lite loans being issued.This is generally seen as a sign of borrower strength, as they are able to extract more favourable terms from lenders – including the ability to lengthen the timeframe before a company goes into default.

4. Uncertainty is the new norm

If there is one thing the last few years have taught us it is that nothing is guaranteed. While the dust of 2016’s political shocks may have settled, between the impulsive- ness of the 45th president of the United States and the UK’s chaotic Brexit negotiations with Europe, private debt managers in the US and Europe still crave clarity on their fate vis-à-vis tax and regulation. Then there is the matter of the current cycle. For some time, industry players have been grumbling about exuberance, bubbles and loose terms, but a downturn is yet to materialise. While the doomsayers are still to be proven right, it is a matter of “when” not “if ” the music stops. At the time of writing, the global stock markets were seeing record losses for the start of February indicating that, if anything, 2018 will bring more uncertainty.