Bumper fundraising amid competition concerns

The number of private debt managers successfully raising much larger European vehicles is expected to keep rising, yet it’s fuelling investor concerns about an overheating, over-competitive market.

Five months. That’s how long BlueBay held its €2 billion second direct lending fund open for new investors. The official final close took a bit longer, with the firm needing another five months to bring in existing investors and sort all the paperwork. But that hardly matters when the hard work was done in less than half a year. 

And while BlueBay stands out for the speed of its fundraising, it’s not the only one benefiting from a fundraising environment ripe for large funds focused on European mid-market corporate lending. 

ICG hit a first and final close of €3 billion on its second direct lending fund in early summer. Alcentra is back in the market with a €1.5 billion fund and Hayfin is also starting to raise its second direct lending vehicle with a €2.25 billion target. 

The US-headquartered managers are active with European vehicles too. Ares hit a first close of €1.4 billion for Ares Capital Europe III followed by a second close on another €400 million in autumn while GSO hit €2.5 billion for its European Senior Debt Fund

This benign fundraising environment for European vehicles is expected to persist, according to our first annual global investor survey, Perspectives, the full results of which will be published next week alongside our December issue. 

Roughly 41 percent of the investors polled intend to invest between $50 million and $250 million into private debt over the 12 months to September 2016 with another 20 percent planning on allocating between $250 million and $1 billion. 

More importantly, European direct lending and senior debt in general was clearly the most popular strategy. Even when compared directly with special situations, the other very popular strategy, most investors favour direct lending, with Europe standing out as the region of choice. 

It is, of course, possible to be a victim of your own success. The survey also shows that competition among private debt providers was one of investors’ biggest concerns. And for the investors worried about competition in European direct lending, seeing the host of large funds raised and in the market won’t be allaying their fears. 

In counterbalance, the largest concern for investors overall was credit risk. 

That investors are focused on underwriting is great. When conditions are not right – the price is too low or leverage too high – that focus on credit risk could be a boon. It should support managers who decide to pull back a bit on deployment during periods of market froth. 

Of course, these are conversations that are yet to happen and bubbles don’t look the same from the inside. So managers hitting euphoric heights of capital raising in record time should be having such risk-orientated conversations early and often. 

These issues and more will be explored in depth in PDI’s Perspectives supplement, available to subscribers next week.