First close is everything

One week, two fund closes, and our first ever ranking of private debt fund managers.

Fundraising has been very much a key theme at Private Debt Investor in recent weeks, with the launch this week of our first ranking of managers based on their ability to raise capital over the last five years. The PDI 30 revealed the top 30 managers globally raised a staggering $322 billion in that timeframe. The top 10 alone accounted for $203 billion, with the likes of Apollo (the top manager) and Oaktree (second place) raising in excess of $28 billion each.

But for every Ares, Lone Star or Cerberus there’s a fledgling manager struggling to win commitments. If there’s one thing that the PDI 30 ably demonstrates, it’s the importance of track record.

That was also illustrated by two fundraising closes announced this week.

They’re both at opposite ends of the spectrum, and are also very different strategically. But the fundraising success enjoyed by US behemoth GSO Capital Partners and UK-based Kreos Capital augurs well for the private debt industry – both funds received strong support from new investors as well as old.

GSO’s latest fund, GSO Capital Solutions Fund II, raised a hefty $5 billion by the time its final close was officially announced earlier this week. GSO hit its upper limit, raised more than 50 percent more than its first ‘Capital Solutions’ vehicle, and received “demand well surpassing the fund’s … hard cap”, the firm said.

You’d expect nothing less of course from a firm of GSO’s calibre and resources. Since its merger with The Blackstone Group (for more on the firm’s history, read our Capital Talk interview with co-founder Tripp Smith HERE), the firm has grown exponentially and now manages more capital than Blackstone’s private equity group.

Then there’s Kreos at the other end of the size spectrum. Its fourth ‘growth debt’ fund raised €240 million after the firm raised its target from €200 million in response to investor demand.

Kreos’ vehicle has a very different strategy to GSO’s latest. 'Growth debt' means a focus on providing relatively short-term, no-covenant loans to SMEs to aid them in their growth. The Kreos team told Private Debt Investor a key element in the firm’s fundraising success was its track record. This comes as no surprise – LPs frequently cite track record as the most important factor when evaluating a manager. They also said investors had been impressed by the team’s longevity and the firm’s resolute adherence to its core strategy; again, both typical responses when investors are asked what they look for in a manager.

An interesting trend however, particularly for smaller managers, appears to be the increasing importance of a first close. Managers, including Kreos, have suggested that many LPs want to see not only evidence of commitments from other LPs but also deals under a firm’s belt before they’re willing to commit. Is this simply evidence of a herd mentality, or does this suggest scepticism about the asset class?

It’s more likely to be simple prudence – especially for managers who can’t point to a series of predecessor funds, evidence of an ability to raise capital and then deploy it successfully into high quality deals is always going to help sway potential investors. There appears to have been a hardening of LPs’ attitudes towards first closes though, which makes building momentum in a fundraise even more important. It will also be interesting to see if ‘younger’ firms manage to break into the PDI 30 next year.

For more on the PDI 30, read the September issue of Private Debt Investor magazine, or click the story below on the PDI and follow the instructions to download a full copy.