Fundraising: Global slow-down

Recent fundraising data shows private debt funds with a broad global mandate are gradually losing popularity to offerings focusing on single regions or individual countries. We explore the reasons.

As far as raised capital is concerned, private debt is on for a record year, according to PDI’s latest fundraising data. While the industry as a whole seems to be on robust ground there are some areas which are doing better than others.

In particular, PDI’s fundraising data for H1 2017 shows investors turning to more narrowly focused funds. Funds with a global investment mandate, while still accounting for more fundraising than single-region and single-country counterparts, are starting to lose ground to their more concentrated rivals.

According to our H1 2017 fundraising report, 47 percent of capital raised for funds closed between 2010 and 2013 was for global products. That figure fell to 36 percent for funds closing between 2014 and the first half of 2017. 

H1 chart

CLICK HERE TO ENLARGE CHART

One reason behind this might be the growing variety of private debt offerings available to investors. Increasingly, single-country funds and sponsorless offerings – which tend to have a narrow focus – have been brought to market by managers.

“There is appetite for single-country funds,” Paul Shea, partner at Beechbrook Capital, tells PDI. This is particularly noticeable in non-sponsored offerings which require managers to be close to businesses and their management.

To execute such a strategy, managers need to understand markets and have a presence in the relevant geographies. “Each country has different idiosyncrasies, legal structures, cultures and so on,” says Shea.

Executing a global strategy focusing on sponsorless lending is therefore difficult. As investors look to these types of offerings, they naturally gravitate to more narrowly-focused funds, Shea noted.

Despite the relative growth of single-region or single-country funds, there are some headwinds facing these offerings. “Large institutional investors such as pension funds or sovereign wealth funds will typically focus on large multi-billion dollar funds that mostly have a global scope to be able to allocate $100 million-plus tickets,” Jeremy Golding, managing partner at Golding Capital Partners, tells PDI.

Smaller investors may also not be receptive to narrowly-focused offerings. “New investors entering the asset class also tend to shy away from funds that are more niche in nature such as single-country funds, at least in the beginning,” says Golding. “They rather start to build up their portfolio with more diversified core investments and might add specialised satellite strategies at a later stage, if at all.”

Still, there are forces driving the adoption of single-country and single-region funds. One of these, according to Golding, is home-country bias. Investors may allocate to funds lending to businesses in an economy they are familiar with.

Shea also notes some investors may wish to exclude certain economies from their portfolio. In this case, allocating to country-specific offerings makes sense. “It allows investors to pick and choose what they think are the best countries,” he says.

There are some scenarios where managers will want to maintain a global mandate. Strategies which are opportunistic will usually have latitude to make investments across multiple geographies, allowing managers to take advantage when a certain situation arises.

“If you consider more opportunistic or distressed debt strategies, it might actually be advantageous to allocate to funds with a broad, flexible mandate to be able to quickly exploit opportunities wherever they may arise,” says Golding.