Deployment and dry powder – private debt pressure points

Some have suggested that fundraising is slowing as a result of a fall of deal-making by private lenders. The figures don’t support that hypothesis.

“The funds struggling to deploy capital will not be here in three years’ time,” said a private debt manager recently. PDI pushed them to name who they were thinking, but like others who have made similar accusations, they declined to name names. 

There most likely are managers struggling to win deals, the alternative lending market is much more competitive than it was just a few years ago. But those are the exception rather than the rule in Europe and the US. PDI regularly talks to a broad range of managers about their deals and the evidence suggests that deal-making is clipping along at a decent pace. 

Others have tied the question of deployment to fundraising. Fundraising is slowing, they suggest, because more firms have a pile of dry powder stashed away and can’t get it out the door quick enough to get back on the road. 

However, the numbers, in terms of both fundraising and deployment stats, also contradict that thesis. 

Fundraising for private debt remained robust in the second quarter with $27.82 billion raised by 42 vehicles, according to PDI R&A. Our research analysts won’t start crunching the third quarter numbers until the end of this month but a quick survey of the summer throws up some serious fundraising by a whole host of managers. 

ICG closed its second direct lending fund on €3 billion. Ardian followed with its €2 billion vehicle. Neuberger Berman broke its target to reach a final close of $620 million on its debut fund. Apollo topped $1 billion with its third structured credit fund, more than 10 times the money sitting in the first and second vehicles. Earlier in the summer Park Square Capital hit $2.4 billion on its second senior fund, later reaching a final close of $2.6 billion.

The running total for corporate debt fundraising in the third quarter is roughly $22 billion, according to PDI R&A. 

But what about deployment?

Plenty of deals were signed by alternative lenders over the summer – not traditionally a busy period for leveraged loans. And while September got off to a relatively subdued start, it is also traditionally the month when much of the groundwork for the last quarter’s more robust dealflow is done. 

Both the pace of new issue supply and credit performance in the senior secured loan market remained healthy during the summer, according to the latest European leveraged loan chart book from Fitch Ratings. 

One lender that PDI spoke to recently said that they were lending capital at twice the projected rate. Others tell similar tales or the rapidity with which they returned to the fundraising scene tells it for them. Alcentra launched its second direct lending vehicle nine months after the final close of the first. 

The more important point about deployment, however, is that it must be done intelligently. Scaremongering about managers failing to deploy cash when a well-flagged turn in the market is on the horizon is short-sighted. Shovelling money out the door as fast as you can is not part of any well thought-out, long-term survival plan. And managers are already subject to pressure to invest via a fee structure that incentivises lending over waiting for the best deals. 

Private debt managers must lend money to make money, but just as essential: they must not lose it.