Debt funds are picking a bigger fight – and this time, they’re winning

Credit managers are now making offers for almost multibillion-dollar loans. But as private credit heads into uncharted waters, the asset class's next big challenge could come from the very force that catalysed its growth.

In March, Blackstone’s GSO Capital Partners offered to provide a €1.5 billion unitranche loan in what would have been a landmark private credit deal. Its bid was ultimately unsuccessful. However, Apollo Global Management is now set to provide a $1.8 billion facility with an even heftier price tag.

The Financial Times described GSO’s massive loan, which was to have supported the purchase by Advent International of Evonik’s acrylic sheets business, as a “a bold effort to muscle investment banks out of buyouts”.

We found the FT’s assessment to be overly optimistic: “While acknowledging their high cost, debt funds tend to make their case based around flexibility and the benefits of working with one lender rather than a group of lenders. In this case, it appears that such arguments did not win the day.” Although we judged the offer to have been a “bold effort”, it was just that: an effort.

This time, however, the outcome has been quite different. According to Bloomberg News, Apollo will provide its unitranche loan to bankroll the purchase by Fortress Investment Group-backed New Media Investment of US newspaper behemoth Gannett Company.

The pricing on Apollo’s loan dwarfs GSO’s offer: 11.5 percent versus a comparatively paltry 7.5 percent, which could have been the pricing on GSO’s facility. The number of zeros in credit vehicles keeps growing and, with it, the size of the cheques that fund managers are able to write.

In 2016, Ares Management’s business development company turned heads when it led a $1.08 billion unitranche to back Thoma Bravo’s buyout of Qlik Technologies, which involved several other funds. Earlier this year, Ares provided a $1.3 billion loan to Daisy Group.

With leverage included, deployable capital in large funds can approach, or exceed, $10 billion. With that kind of buying power, the fund manager could almost purchase all the teams in England’s Premier League, according to football statistic site TransferMarkt.

The success of private debt funds could have an ironic ending, however. Their growth is bound to attract the attention of regulators in a much more significant way, particularly if the firms have created more systemic risk than they realise.

This story – the regulatory crackdown on banks – is one of the central strands in the saga of the rise of private credit. Although greater oversight from governments and central banks around the world would be unlikely to herald the end of private debt, it could significantly alter the asset class. Put another way, the very force that catalysed private credit’s growth as an asset class could reshape the financial services sector yet again.

Write to the author at