Making America sated again

Fundraising is trending back in favour of the world’s largest private equity and private credit markets.

Distressed debt fundraising cash is flowing into funds centred on North America, potentially signalling a shift in investor appetite, as vehicles with a global investment mandate had made up an increasingly larger share in the past few years.

North American funds targeting troubled companies closed on 31.4 percent of distressed debt capital in the first quarter, according to PDI data. That’s around three times more than the 10.9 percent raised for the continent in 2017.

In 2015, 51.1 percent of total distressed debt capital collected could be deployed around the world. For 2016 and 2017, that figure increased to 74.2 percent and 78.8 percent, respectively. In the first quarter it dropped to 58.3 percent, largely consisting of GSO Capital Partners’ $7.1 billion GSO Capital Solutions Fund III.

Global capital may still stage a strong showing this year. Strategic Value Partners’ Strategic Value Special Situations Fund IV in early May closed on its hard-cap of $2.85 billion, comprising a commingled fund and a $350 million fund-of-one. In addition, TSSP, the credit arm of TPG, is seeking $8.5 billion across three vehicles, a significant portion of which will target stressed or distressed corporate credits.

Though particularly pronounced in distressed debt, the narrative applies across all private credit investment strategies: senior debt, mezzanine debt and the like. North America-centric vehicles, were seeking $84.4 billion at the end of the first quarter, while funds with a global mandate, defined as investing in more than one region, were looking for $69.0 billion, according to PDI data.

The opposite was true for total money raised: global funds raised more than North American funds. Those searching for deals across different geographies closed on $17.4 billion over the first three months of the year, while North America-focused vehicles rounded up $12.7 billion.

Credit managers may have seen opportunities globally, but in an era of uncertainty could be pivoting to North America – though to be fair, a Trump administration hasn’t been a boring, staid affair. In addition, the continent may have some appeal with dealflow down and dry powder up: the US houses the world’s largest markets for private credit and private equity.

Because many private credit managers rely on private equity-backed transactions for a large number of their deals, it is only natural to follow private equity dealflow. There was $633 billion of dry powder for buyout deals alone at the end of 2017, according to Bain & Company’s 2018 annual private equity report.

Now, of course, the fundraising figures always come with a footnote: the shift to North America will only be complete if managers meet their funds’ targets. Given that we came off a record-breaking year, it’s not an outlandish conclusion that North America could once again top the charts.

This is not to say that Europe or other jurisdictions are being ignored. Ares Management recently held a first close on its Ares Capital Europe IV fund of more than €5 billion of equity commitments, while Intermediate Capital Group is oversubscribed for its €4 billion junior debt-focused ICG Europe Fund VII.

But should the first-quarter figures be a harbinger for the year, it would represent a significant change from the past couple of years when global funds garnered significant amounts.

This piece was adopted from commentary PDI writes for The Lead Left, a private credit industry newsletter published weekly by Churchill Asset Management’s Randy Schwimmer.