Earlier this week, we reported on the launch of a new $12 billion investment platform by Apollo Global Management, the New York-based fund manager, and Mubadala, the Abu Dhabi-headquartered sovereign wealth fund. That headline figure was bound to raise eyebrows – equivalent to one-fifth of the total $60 billion raised by private debt funds globally in the first half of the year.
However, size is not the only interesting thing about this bold new entrant to the private debt universe. According to senior ranking Apollo credit professionals John Zito and James Zelter, the platform is seeking to occupy what the firm perceives to be ‘white space’ where the upper end of the direct lending market meets the lower end of the broadly syndicated market. It is, in other words, looking simultaneously to become both a big fish in a small pond and a small fish in a big pond.
The direct lending market has been, almost by definition, mid-market. To an extent this has been dictated by the size of funds available to invest in it. As a young asset class, private debt has rarely seen fund sizes of more than a few billion dollars. It is nowhere near on the same scale as private equity, for example. However, this does not mean that significantly more capital could not be deployed if it were made available by investors. By reaching up as high as $2 billion in terms of individual loan size, Apollo is set to become a pioneer of direct lending to large companies.
The investor base in the broadly syndicated loan market, meanwhile, has been largely dominated by collateralised loan obligation funds. However, the problems in the CLO market in the wake of the covid-19 outbreak have been well documented – with even the supposedly safest tranches coming under pressure. Up to now, private debt funds have only appeared on the fringes of the BSL market. Citing an “interesting dynamic” with many CLOs in breach of covenants and unable to do new financings, Apollo clearly feels there is an opportunity to make its presence felt.
Some will wonder whether the growing presence of private debt funds in the BSL space may bring with it a greater insistence on covenants and thus a changing borrower/investor dynamic. However, it’s at the mid- to lower-end of the private debt market where covenants have been most fiercely protected – at the upper end, differences with BSL documentation are less obvious.
Another issue to chew over is whether Apollo’s tie-up with the giant Mubadala – which has $229 billion under management according to its website – could herald the meaningful entry of SWFs into the private debt space. Up to now, SWFs have appeared to be more tentative about private debt than other asset classes but could Mubadala’s move be the trendsetter that others follow? This hefty new platform could be a gamechanger in more ways than one.
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