Logic rules as managers expand private credit strategies

It’s results season and the third quarter was hard on many listed US alternatives managers. However, there’s a private credit silver lining.

Falling earnings and the resultant capital flight from liquid or semi-liquid hedge fund strategies hit several large alternative asset managers this year. And the third quarter reporting period has emphasised that trend, which has become ever more sharply defined over the course of 2015. 

Och-Ziff was one of those badly hit. Third-quarter distributable earnings stood at $66.1 million, 44.3 percent lower than the same period last year. At the end of September, assets under management had also fallen 5 percent year-on-year to $44.6 billion. 

In tandem with its results, Och-Ziff revealed it would be expanding a number of credit-related strategies. It is setting up a non-traded business development company in partnership with NorthStar Asset Management and plans to expand into European CLOs, as well as energy credit and equity. 

“Over time, we believe that our US performing credit platform, which currently managed $7 billion of assets, could grow to $20 billion-plus,” said chairman and chief executive Dan Och. “And our European platform could be another several billion in AUM.”

Och-Ziff is far from alone in this transition. 

Carlyle has suffered as poor performance at its long/short credit hedge fund, Claren Road Asset Management, led to a swathe of redemptions. Quarterly declines in distributable earnings were down to falling hedge fund management fees and performance fees. 

Fortress, meanwhile, has already shut down its macro hedge fund business. Management said this week that the closure, while regrettable, would boost earnings as the hedge fund business had lost around $8 million this year. Its shuttered hedge funds had $1.8 billion under management, 2 percent of Fortress’s total $74.3 billion.

And while Fortress’s credit chief Peter Briger isn’t that bullish on opportunities in the market, the firm has just closed its third credit opportunities fund on its $1.1 billion hard-cap. 

Carlyle is more sanguine on credit. “We expect GMS management fees to move higher in the next several quarters as we turn on fees for our new energy mezzanine and distressed funds and continue to raise additional capital,” co-founder Bill Conway said during Carlyle’s earnings call. 

Other big names pushing deeper into debt are TPG and Apollo Global Management. 

TPG is raising its second TSSP Adjacent Opportunities Partners fund. The open-ended vehicle is targeting $3.5 billion and will invest alongside TPG’s various credit funds and platforms within the firm’s special situations business. 

Meanwhile, Apollo has grown its credit assets under management to $113 billion from $108 billion at the end of September 2014. MidCap, the firm’s asset-based lending unit, is busy expanding into new sectors in the US, as well as building a European business on the back of a GE Capital portfolio acquisition. The new direct-lending platform could expand its capacity by distributing credit assets it originates to Apollo’s growing bundle of financial affiliates, a mix of banks and insurers. 

Quarterly results aren’t best way to track fund performance; in most cases it’s a long-term game. But it hasn’t been a single quarter of falling performance and growing redemptions at hedge funds. And the continued push to grow credit even at firms without those same issues, like Apollo and TPG, reinforces the opportunity.

The push by some of the biggest managers in the business to expand their private debt platforms is positive all round – the still new asset class earns big-name endorsement, while managers can look to a long-term play that’s not as subject to outflows or performance volatility.