Optimism prevails as fundraising falls

Market sources are not predicting a reversal of last year’s decline in capital raised, but support for the asset class remains strong.

Last year’s 7.5 percent drop in global private debt fundraising – from $120 billion to $111 billion – was clearly not a substantial change, but does it nonetheless hint at a slight reduction in appetite for the asset class?

A number of sources canvassed by PDI appear to suggest so by predicting that the 2016 total will not be passed in the year ahead. They point out that a number of the industry’s big-hitting fund managers already have swollen coffers and no need to tap the investor base again in 2017. For example, as last year drew to a close, a couple of substantial fundraisings from HPS and Crescent were making headlines with billions gathered.

The same sources are equally insistent that investor appetite for private debt remains as strong as ever, but the money will find homes other than the mega-funds. They predict that mid-market GPs will be the beneficiaries, with some of the more popular ones harbouring realistic ambitions of doubling the size of predecessor funds. Although this may prompt concerns about the wisdom of departing comfort zones, the more common view is that it will simply mean firms doing the same kinds of deals but syndicating less to co-investors.

The point is also made that, with investors demonstrating a preference for low-fee, tailored products, a larger proportion of capital raising in the year ahead may be accounted for by separately managed accounts. Depending on the level of transparency, this capital may not necessarily find its way into fundraising totals.

Underneath the headline figures, which strategies will be in favour? Perhaps the best answer to this is that it depends on who you are. In what is likely to be a volatile and unpredictable backdrop to investing in 2017, some investors are tipped to try to juice up their returns by targeting higher-risk strategies, such as distressed and special situations and sector themes like healthcare and consumer. By contrast, others – especially those with a large exposure to the fixed income space – will more likely respond by taking refuge at the more conservative, plain vanilla end of the spectrum.

In Europe, there is concern around regulation and taxation as the UK kick-starts the process of leaving the EU. Due to the lack of clarity, some continental European investors are wary of UK exposure. By the same token, perhaps fearing that the UK Brexit vote may not be the last tremor to shake the region’s political foundations, US investors may be more cautious about Europe as a whole and will expect a higher premium in exchange for perceived elevated risk.

On the whole, though, a reduction of appetite for private debt is not expected – even if, when the year’s final fundraising numbers are totted up, they once more move down rather than up.