Brave new managers face tougher world

A rash of substantial industry players have revealed plans to launch new debt-focused firms or take up new posts at existing managers to expand the credit platform so far this year.

Doug Ostrover, one of GSO’s three founders, and Marc Lipschultz’s, KKR’s head of energy and infrastructure, are setting up Owl Rock Capital with a private fund and a business development company (BDC). Adams Street Partners hired former Oaktree executives Bill Sacher and Shahab Rashid to launch a private credit business. Kayne Anderson tapped THL Credit’s founder Jim Hunt to expand its credit platform, while GE Capital’s former global head of sponsor finance is now running direct lending at HIG Whitehorse. The list goes on.

It’s an interesting time for these firms and others to be raising money for credit funds. Several of the top publicly-traded asset managers and BDCs have been hit by equity market volatility, the high-yield bond tumble or continued declines in energy. Entering the sector while the big listed managers are reporting losses and mark-to-market declines is contextually very different from the hothouse environment that the established names grew up in.

While big names like Ostrover and Lipschultz will probably have little trouble raising money, putting it to work might be another story. Despite any pressure to invest from investors, market conditions at the moment are not the most conductive to making loans as the turn in the credit cycle and an increase in defaults is widely anticipated.

Distressed asset trades and buying discounted secondary portfolios are popular strategies to be getting into, but that kind of swivel will be a lot more difficult for a manager without a developed capital base and substantial investors onside.

Which leads us to the issue of fees. Only charging fees on invested capital, rather than as soon as it is committed, is the norm in private debt. Any delay in putting capital to work means limited income with the knock-on effect of fewer resources to build the platform and hire staff.

A few of these new platforms could opt to defy the fee ‘convention’, but would likely find themselves hamstrung in terms of competitiveness and the pool of interested investor capital.

There's little doubting the popularity of private debt with investors at the moment, so many of the new managers should find ways around these challenges – at least to begin with.

But the road to success and the similar (but not precisely the same) path to scale will be slower than it was for the firms that enjoyed the more benign conditions of the post-crisis years.