Dollars are always greener on the other side

So you like fundraising stories? We can tell.

PDI’s updates on quarterly fundraising totals quickly jump to the top our of “most popular” section, while subscribers frequently call with reactions and are often keen to compare notes and ask questions about their competitors’ fundraising numbers.

Earlier this week, we reported that private debt funds globally raised $31.4 billion in the second quarter, according to PDI data, double the first quarter’s relatively quiet $15.4 billion total. This brought the money collected in the first half of the year to $46.8 billion, a sizeable number though still smaller than the last two years’ H1 totals.

Whether managers are encouraged or discouraged by these stats, it’s worth noting that there is a lot more nuance behind the numbers. For one thing, they only represent final closes, and in recent weeks PDI reported on many strong interim closes, such as Oak Hill Advisors’ global distressed fund, and HPS Investment Partners’ and Crescent Capital’s mezzanine funds.

Behind the scenes, managers tell PDI they are gathering assets in different ways. Some are raking in billions in separately managed accounts or launching products to tap the retail channel. Increasingly, what we hear from managers is that many are trying to tap previously unchartered investor channels or geographies.

Some institutional managers admit they can’t rely on defined benefit (DB) pensions like they used to, as DB assets are on the decline. Instead, as defined contribution (DC) money grows and the retail market is huge, managers are salivating over the piggy bank on the other side. According to research from Willis Towers Watson, global DC assets grew by 7.1 percent over the last 10 years and now amount to 48.4 percent of global assets, while DB assets only increased by 3.4 percent over that time. Assets in global mutual and exchange-traded funds are estimated to be at around $37.4 trillion, according to the Investment Company Institute.

Though selling into that channel isn’t easy. There are thousands of financial advisors around the country and retail investors are a completely different beast. Partners Group recently launched a DC-focused product. Other alternative managers started “liquid alternative” mutual funds in recent years with mixed success.

BDCs, which have historically been sold through the retail channel, are going in the other direction. Many are having trouble with beaten up valuations and are looking for “sticky” institutional money to help bolster their stock prices. “Investors are always looking for transparency, and with a BDC all the transparency is already there, so why wouldn’t they buy?” one BDC manager told PDI.

Yes, but institutional investors often want “proprietary transparency,” not having their managers’ holdings and performance viewable by anyone on a web page. Critics of the BDC structure also argue that it might make some borrowers and sponsors less willing to do deals with managers that have to disclose their names and terms to the public.

Though some firms seem to be succeeding at getting traditional LP money into BDCs. They tout the fact that, if the stock performs well, investors can benefit from two return streams: performance on the lending portfolio and the stocks’ gains. TPG Specialty Lending (TSLX) has the Ohio State Teachers Retirement System and USS Investment Management as its top two institutional holders, while Owl Rock Capital Partners recently won a $150 million commitment from the Oregon State Treasury, interestingly into its non-traded BDC rather than a private fund, though the firm is raising both.

Either way you slice it, the ability to raise money through different investment structures and channels is becoming more important. But doing so well requires learning a lot about how that investor group operates, rather than just viewing them as the cash cows of tomorrow.