Friday letter: Bulking up and branching out

Well, Intermediate Capital Group had a good year. 

On Tuesday, the London-headquartered private debt firm announced that it had raised a record €3.8 billion of third party capital for the year ending 31 March, a 69 percent increase from its previous annual high. The fundraising boom fueled an 8 percent spike in third party assets under management to €10.7 billion and, what’s more, 45 percent of that fresh capital was for new strategies and first time funds.   

Now in its 25th year, there was a time when ICG was a niche investor with a focus on European mezzanine only. Now the firm is a global and multi-strategy provider of mezz, private debt, leveraged credit and minority equity to mid-market corporates in Europe, Asia and the US, as well as real estate in the UK.

In the current quarter, the firm has continued to enjoy success on the fundraising trail. Its debut North American fund held a first close on $450 million in May, that on top of its first US CLO, which closed on $371 million in March.

Investor confidence is paramount to successful marketing efforts, and that confidence tends to manifest upon a fund manager’s demonstrated performance. To that point, even ICG’s lowest performing fund is currently valued to yield a gross 1.2x money multiple and that vehicle, 2011’s €2 billion ICG Europe V, is only 58 percent invested.

“The strong year of realisations, which follows a period of low realisations, has provided further evidence of our ability to generate good cash returns from our portfolio and continue to enhance our track record,” according to the firm, which reported balance sheet realisations of more than £1.1bn of cash and £2.7bn to fund investors.

ICG’s progress – as well as that of firms such as The Carlyle Group, Kohlberg Kravis Roberts and GSO Capital Partners/The Blackstone Group, among others – speaks to investors’ growing acceptance of private debt as a unique asset class. But perhaps more importantly, that acceptance has given fund managers licence – or at the very least, a willingness – to explore new geographies and product lines. 

ICG is not alone in its commitment to extending beyond its historical comfort zone of European mezzanine investment. Acclaimed distressed debt specialist Oaktree Capital Management raised $12.5 billion in fresh capital in 2013, $5.1 billion of which was for strategies that did not exist three years ago, and the expansion of Carlyle’s Global Markets Strategies platform has come with the launch of several new products, including a BDC. Both GSO and KKR have held record fundraises on their respective rescue lending and special situations funds in the last 12 months, the latter of which is a debut vehicle. 

In short, private debt managers’ ability to fundraise is no longer simply a function of investor appetite for debt-related funds, but also their own ability to find and exploit new opportunities, thus continuing to diversify their often bulging businesses all the time. The next test facing them will be the next correction in the debt markets. Then, depending on how brutal that correction is, the task will be to demonstrate resilience under pressure. Some of them have been there before. For those who have spent the years after Lehman bulking up for the first time, it will be a challenging new experience.