BlueBay Asset Management and Alcentra have dominated the European direct-lending fundraising landscape in 2019 – the former holding a close on more than €6 billion earlier this year, the latter wrapping up a €5.5 billion vehicle this week.
These impressive sums again underline the industry’s gradual consolidation into a capital-raising elite, which should cause concern among limited partners. Whether it’s through raising ever-larger funds or snapping up other managers, the private debt space is continuing to see more capital going into the hands of fewer firms.
The trend is a good thing for the managers concerned and for capital markets. However, it presents a potential downside to investors, as it boxes them into accepting the status quo when it comes to fund economics. And we know that fees will always be important to LPs.
In our annual PEI Perspectives survey, we asked investors to identify the recurring points of contention with managers during the due-diligence process.
The issue that garnered the most agreement was management fees, which around 45 percent claimed were a sticking point. Some 36 percent said performance fees were an obstacle, thus putting them in third place behind issues surrounding key-person clauses.
In a separate question, around 63 percent of investors either “strongly agreed” or “agreed” that private equity fees were difficult to justify internally. Although there are differences, private credit fees bear a resemblance to private equity fees.
On the upside, the consolidation of industry power represents a maturation of capital markets. Alternative lenders are now regularly writing cheques of more than $1 billion, providing larger companies with a real alternative to the bond markets or, in some cases, the broadly syndicated loan market.
The march to fewer market players enables the credit shops with the wind in their sails to increase their breadth of dealflow with beefed-up origination platforms, which in turn allows them to be more selective. Consolidation also helps to eliminate firms that have been delivering less-than-stellar returns to their LPs.
But it could hinder asset allocators’ ability to influence fund economics.
Many managers that raise large funds end up oversubscribed, which gives them the upper hand when it comes to negotiating the various fees the vehicles charge. General partners have less incentive to alter fund economics when investors are clamouring to get into whatever vehicle they may be raising.
This is not to say that fees will be escalated dramatically simply because the potential is there. GPs have an incentive to do right by their investors, and part of that involves implementing a fair fee structure.
A survey of credit managers last year by the Alternative Credit Council showed that 21 percent of responders from large firms (those with more than $1 billion committed to private credit) had lowered fees, while only 9 percent had increased them. Some 71 percent had kept their fees constant.
Even though only a few firms are upping their fees, investors still need negotiating leverage to ensure a level playing field. If there are fewer avenues for LPs to vote with their feet, they risk facing a take-it-or-leave-it done deal.
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