LPs still flocking to senior and distressed

The appetite for both strategies seen in 2017 continued into Q1 2018, according to our latest data. Most ongoing capital-raising is for junior debt, however.

Of the 28 private debt funds which achieved a closing in the first quarter of 2018, more than half are focused on either senior debt or distressed debt according to PDI data for the first quarter of this year.

Senior accounted for $12.7 billion of capital raised by 11 funds with distressed hot on its heels with $12.2 billion raised by four funds. Together, they accounted for almost $25 billion of the quarterly fundraising total of just over $35 billion for all private debt strategies.

This continues a trend seen in 2017, when senior debt fundraising surpassed junior debt fundraising for the first time in many years and distressed debt also came to the fore as investors anticipated an end to the long-benign credit cycle.

Subordinated/mezzanine debt funds saw as many closings as senior debt in the first quarter (11) but the total raised came in at just $9 billion. However, in terms of funds in market, subordinated/mezzanine debt leads the way with 185 funds seeking to raise just over $85 billion (see chart below). This compares with 166 senior debt funds targeting almost $72 billion and 90 distressed funds looking for almost $59 billion.

The data also underlines the extent to which capital is gravitating to the largest funds and creating an elite group of fundraisers. Up to and including 2016, the largest average private debt fund size in a given year was the $696 million recorded in 2013. Last year saw the average size skyrocket to just over $1 billion, while the average in Q1 2018 rose further to almost $1.3 billion.

It was a strong quarter for multi-regional funds, which raised more than $17 billion of capital, beating the near-$13 billion raised by funds focused on North America. This is a reversal of the dominance of North America-focused funds in market, of which there are 239 raising more than $84 billion; compared with 71 multi-regional funds aiming for just over $69 billion.

Overall, the first quarter of 2018 was another strong period for private debt fundraising. On the face of it, the $35 billion raised would not put 2018 on course to beat last year’s record total of $187 billion. However, the first quarter tends to be the quietest period of the year for fundraising so an acceleration may be expected.

The largest fund closed in the first quarter was the $7.1 billion GSO Capital Solutions Fund III. The top five also included Goldman Sachs’ Broad Street Real Estate Credit Partners III ($4.2 billion); Clearlake’s Clearlake Capital Partners V ($3.6 billion); Golub’s Golub Capital Partners 11 ($2.3 billion); and Orion’s Orion Mine Finance Fund II ($2.1 billion).