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The most notable trend in private debt fundraising over the past decade has been its growth. Whether it’s the average fund size, the size of the overall market or the scale (and ambitions) of the fund managers, the industry has expanded at a pace that has surprised many in the finance industry.

That’s especially true in North America where fundraising hit an all-time high of $119 billion last year. That strong showing was maintained in the first half of 2022 when fundraising totalled $48.2 billion, only just off record pace, according to PDI data.

Even more impressive was the size of the funds that closed. The average size of a North American private debt fund rose from $288 million in 2019 to $736 million in 2021 and has topped $1 billion in the first half of this year.

The largest close was for Crescent Direct Lending Fund III, which took in $6 billion to back the US lower mid-market. Even the 10th-largest close of H1, Stellus Credit Master Fund III, raised $1.8 billion.

Tom Stein, head of private debt in the Americas at Partners Group, says: “Four or five years ago it was difficult to put together a unitranche that would sum a billion dollars or more. Now, that is routine in the US and will become more pervasive in Europe as well.

“The size of the direct lending market will challenge that of the syndicated loan market very soon.”

The rise of the average fund size also points to another trend: consolidation among the more established fund managers, making it more difficult for new entrants.

“The private debt space is becoming more concentrated where LP liquidity is attracted to larger and more established managers, so it takes a unique approach for newer managers to build momentum,” says Benjamin Wu, CEO of Brex Asset Management, which targets the venture and growth equity markets.

So where is the US debt market headed? Our US Report highlights three main trends:

1 Credit seen as offering downside protection in tough times

“Particularly during uncertain economic times, private debt can serve as a less correlated portfolio diversifier,” says Jason Strife, head of junior capital and private equity solutions at Churchill Asset Management. “And as a lender, it’s a more favourable time in terms of the absolute level of activity, while being able to price deals 100-150 basis points higher than we were even three, six or nine months ago. In the medium to long term, private credit managers will be better positioned than most in terms of raising money from LPs.”

Theodore L Koenig, chairman and CEO at Monroe Capital, agrees that private debt has inherent strengths in the current environment: “Anytime there’s a period of rising interest rates, private credit is going to do better than periods characterised by a more dovish Federal Reserve. Rising interest rates translate into an increase in coupons, while widening spreads provide an added bump to returns,” he says.

“From an investor’s standpoint, the floating-rate nature of loans is a primary selling point across private credit.”

2 A willingness to branch out to new areas

“Even within private credit, we’re seeing sponsors wanting to branch out into things they haven’t traditionally done,” says Kirkland & Ellis partner Carrie VanFleet. “I’m seeing more debt sponsors want to explore investing in structured finance solutions, for example. I’m seeing more clients want to understand what they need to do to have a direct lending business when they haven’t run one before.”

The secondaries market is one area of focus, says Jess Larsen, founder and CEO of Briarcliffe Credit Partners. “Some investors are considering the secondaries market if they are overallocated in the primary market, or putting a hold on investing until the denominator effect reverses. Others think the private markets are the best place to be given public market volatility and are rotating into safer harbours like private credit.”

Larsen says there is increased interest from LPs in secondaries trading of illiquid holdings, mainly in private equity, and a private market rotation into private credit where there is strong downside protection and LPs can still meet their internal hurdle rates.

But safety first is very much the order of the day in the current environment. “We don’t try and time the market or stretch our credit box,” says Mike Hynes, managing director, origination, at Antares Capital. “We may shy away from some sector or subsector if there is some specific issue, but we generally don’t make bets via sector rotation per se.

“Instead, we tend to avoid more cyclical areas like energy and retail and focus more on best-in-class companies within recession-resistant sectors like software, business and financial services, and healthcare where we see secular growth and more stable cashflow.”

3 A growing focus on private wealth

Monroe Capital’s Koenig says private wealth clients have become an “important channel for fundraising”, which has become “a lot more sophisticated” in the last several years.

Greg Myers, global head, debt and capital markets at Alter Domus, agrees. “We’ve been doing fund administration for a number of the open-end private credit structures that include private wealth clients. A lot of the managers we work with are familiar with close-end structures; they might have $500 million of committed capital and they know they can call it in three years and put it to work.”

That’s leading to family offices also becoming a part of the investment mix, says Wu. “The institutions have had a fair bit of experience with private debt over the years since the GFC. We are seeing family offices become of greater and greater importance in both PE and private credit.”