Friday letter: Scale for sale

There has been a noticeable smatter of mergers and acquisitions among managers in the private debt market recently. So has the anticipated wave of consolidation begun? And does it benefit investors as much as the managers?

While speaking to senior debt managers at a large asset manager this week, PDI asked for their thoughts on the recent wave of acquisitions and mergers within the private debt market. They were initially perplexed by the question.

So PDI reeled off a list of transactions: Ares/Kayne Anderson; Mediobanca/Cairn Capital; GAM/Renshaw Bay; Apollo/AR Capital; Benefit Street/TICC – and those are all in the last three weeks. If we go back further there’s also Fortress/Mount Kellett, PennantPark/MCG, Omni Capital/Brookland, as well as Hayfin’s internal shareholder reorganisation. And all that is without even mentioning the GE Capital sales. Just this week the firm announced that it has sold its healthcare finance business to Capital One.

The debt managers went from sceptical to agreeing that the list does at the very least constitute a flurry of activity. They had been aware of the Ares/Kayne Anderson deal, indeed something of that scale – combining to create a $113 billion asset manager – is hard to ignore, and one or two others.

But not being at the coalface of reporting on the deals nor contemplating an acquisition or sale themselves, they hadn’t pondered whether this might mean the private credit market is entering a new phase of development. 

A bit more digging reveals one US manager contemplating a European acquisition, while other market players on both sides of the pond tell PDI that they are aware of potential deals in the works.

“Arbour Partners is working with more than one manager now looking to add whole businesses through the M&A route rather than by raising new funds in an increasingly competitive fundraising environment,” said James Newsome, managing partner at Arbour Partners. “Prime motivations right now, apart from building assets under management, are to add a geographical footprint in Europe or to buy quickly a new sourcing channel such as sponsor-less lending.”

The private debt market is clearly growing in scale; the fundraising totals for this year’s PDI 30, which will be published next month, make that clear. And scale is so important in this higher cost, lower return sector (versus private equity) that managers must seek it wherever they can find it – organically or through mergers and acquisitions. 

Chasing scale is the obvious motivational driver in several of the recent deals, including Ares Kayne and Mediobanca’s purchase of a 51 percent stake in credit fund Cairn Capital, which almost trebled the Italian lender’s indirect assets under management. 

For investors, however, such deals raise questions about the quality of the new additions. If a firm is focused on rotating its business model from performance fees to fee-earning assets under management, it’s going to be difficult to maintain a full alignment of interests. 

That’s not to say that consolidation shouldn’t happen within private debt. But managers and investors need to know what they’re getting into.