Loan Note: Apollo’s new $12bn platform, Fitch warns on revenues, fundraising pick-up

The platform that straddles direct lending and broadly syndicated loans – and it's a mere $12bn in size. Plus: Fitch's revenue warning and a fundraising fillip for Europe.

They said it

“The downside risk in super- and mega-cap funds is less pronounced and, as such, the managers running these funds are viewed as a safe bet by investors”

Matt Portner, a McKinsey partner who co-authored a report this year into the attractions of mega private equity funds. CVC Capital Partners last week announced it had closed its eighth flagship PE fund on €22 billion

First look

The $12bn game changer

James Zelter
Apollo’s James Zelter: ‘meaningful demand’ for larger deals

Along came Apollo Global Management and Abu Dhabi-based sovereign wealth fund Mubadala and, in one fell swoop, they unveiled a new direct lending platform one-fifth the size ($12 billion) of all private debt fundraising globally in the first half of this year ($60 billion).

On the rationale for the platform, John Zito, Apollo’s deputy chief investment officer of credit, spoke of the “white space” between the mid-market and the general corporate market. James Zelter, the firm’s co-president, also referred to this gap and the “meaningful demand” for finance that exists there.

The gap is perceived to have two elements. The first is the upper end of the traditional direct lending market. Only a few fund managers have been able to do deals of $1 billion or more – here’s an example from Ares – and often as part of a small consortium. Apollo will do deals of at least $1 billion – and up to $2 billion – on a sole lender basis.

The second element is the broadly syndicated loan market, where private debt firms have only been able to operate around the fringes – again, for reasons of scale. But, as our recent coverage has indicated, problems in the CLO market – traditionally the biggest players in BSLs – could well open up space for new participants. With the heft of an SWF behind it, Apollo now has the necessary punching power to be taken seriously.

Questions remain, such as whether other fund manager/SWF tie-ups of this nature may be in the offing. Stay tuned to Loan Note as we dive deeper into this issue and feed back to you our views from the market.

Revenue assumptions out the window
It’s no big surprise that coronavirus-related uncertainty has caused more than 40 percent of companies in the S&P 500 to pull their quarterly or annual earnings guidance. However, a report by Fitch Ratings estimates the virus will lop off a whopping $8.5 trillion of revenues, or nearly a third, from an estimated $26 trillion-plus global corporate portfolio over the next 18 months.

Before the virus erupted, the rating agency “kind of assumed that revenues would have grown by 2.5 percent each year, roughly in line with GDP,” Richard Hunter, its global head of corporate ratings, told Private Debt Investor. “But the scale of this downturn is totally unprecedented.”

Data snapshot

Where the money’s going. Europe took over North America’s traditional mantle as the leading region for private debt fundraising in the first half of 2020. Paris-headquartered Ardian closed the largest European fund in the period: its $3.4 billion Ardian Private Debt Fund IV.

Essentials

Read about private debt’s biggest issues
How much support do portfolios need? Is this the end for covenant-lite deals? What sorts of additional demands are LPs making? In our Talking Points report, now available to download here, we take a look at the big questions dominating conversations in the private debt industry today.

Dalio on how central banks are transforming markets
Capital markets are no longer free due to the increasing influence of central banks – so argues Ray Dalio, the billionaire hedge fund manager and chief investment officer of Bridgewater Associates, in a lively video we’ll think you’ll enjoy viewing here.

LP watch

Institution: Cincinnati Retirement System
Headquarters: Cincinnati, US
AUM: $2.04bn
Allocation to alternatives: 28.07%

Cincinnati Retirement System has confirmed its first known commitment to a private debt fund, according to the minutes of the pension’s board meeting in June.

CRS has committed $40 million to HIG Bayside Opportunity Fund VI, a distressed debt and special situations vehicle managed by HIG Capital’s credit arm.

The $2.04 billion public pension allocates 28.07 percent of its investment portfolio to alternative investments.

Institution: Teachers’ Retirement System of Louisiana
Headquarters: Baton Rouge, US
AUM: $18.72bn
Allocation to alternatives: 41.0%

Teachers’ Retirement System of Louisiana has agreed to commit $100 million to Blackstone’s GSO Capital Opportunities Fund IV and $75 million to Torchlight Debt Opportunity Fund VII, a contact at the pension informed PDI.

The $18.72 billion US public pension has an 8 percent target allocation to private debt that currently stands at 7 percent.

Its recent commitments have been to funds focused on the corporate and real estate sectors in North America.


Today’s letter was prepared by Andy Thomson with John Bakie, Robin Blumenthal and Adalla Kim