Friday letter: A feast of fundraising

Four fund closes this week, and more than $2.7 billion of commitments tied up. Can the managers make good use of their fresh capital?  

It’s been a good week for fundraisers.  

As Private Debt Investor revealed earlier today, Hong Kong-based SSG has just finished dotting the I’s and crossing the T’s for its latest fund on a cool $915 million, significantly ahead of its target of $800 million.

Aside from the quantum of capital raised, the fundraising was rapid, taking just six months from start to finish. Whoever said distressed debt investing in Asia was a busted flush?

Over in Europe, Rothschild was also in on the fundraising act, holding a final close for its Five Arrows Credit Solutions junior debt fund on €415 million, again above target.

And Metric Capital Partners is posed to hold a final close on €450 million for its sophomore fund in the next few weeks, having held a first close on €340 million a week ago.

Lastly, real estate debt specialist DRC Capital closed its second European fund on £487 million (€596 million; $818 million) yesterday having set a target of £400 million.

So, four funds with first or final closes totalling more than $2.7 billion in the space of a week, with at least a further $1.5 billion of capital still to come from one of those funds and another just launched: news emerged this week too of Park Square returning to market with a new fund (although we’ll have to credit Reuters this time with the scoop). The Robin Doumar-led firm is targeting €1 billion for its third vehicle in its subordinated debt suite of funds, some €150 million more than it garnered for its 2011 vintage predecessor.

If fundraising is any barometer of an industry’s wellbeing, the private debt industry appears to be in rude health.

What’s particularly interesting is the size of each fund relative to its predecessor. SSG has more than doubled the amount of capital raised between its second and third generation funds, a sure sign of both ambition and also investor appetite. Indeed, sources close to that fundraising process indicated the firm had received applications for more than $1.4 billion of commitments, which had to be dialled back to the hard cap.

At £487 million, DRC’s third fund was considerable larger than the £300 million ERED II, whilst Metric’s maiden effort, at €300 million, has already been comfortably surpassed by the firm’s follow-up.

For a relatively young industry, this bodes well. It suggests firms have been able to demonstrate an ability to deliver against performance targets and originate deals. And of course, that investors are buying the story. 

A few words of caution, however. Many of the industry’s most successful managers constantly refer to the importance of “sticking to your knitting” – or less colloquially, avoiding strategy drift. Raise too big a fund, and you’re suddenly forced to play in a larger segment of the market where, potentially, competition is fiercer. Banks are a less egregious presence in the lower and mid-cap segments of the market, but rise too far up the spectrum and they start to feature more prominently.

The resourcing issue is less of a factor, if the firm in question simply increases ticket sizes to match the larger fund rather than simply doing more deals.  Many of the managers we’ve spoken to over the last year, all of whom have successfully built sizeable franchises, have trumpeted the benefits of scale yet also stressed the importance of achieving it in a measured, purposeful way.

The managers who have closed funds this week have taken important steps on that path, so as the sun shines on PDI Towers here in London, we’ll raise a glass tonight to toast their success.