With every publication of the PDI 50 annual ranking, it becomes clearer who the major players in the industry are. The list – which ranks managers by the amount of capital raised over the previous five years – is now almost guaranteed to feature the same firms at the top. Even if the order among them changes, their collective might dominates the landscape.

Even so, there is plenty of fresh blood in this ranking. No fewer than 10 firms have made their debut this year or re-entered having dropped out. Some of these entrants are already established names within the industry, including the likes of Benefit Street Partners, Churchill Asset Management, Twin Brook Capital Partners and AMP Capital. Others are less well-known. Then there are firms like Kayne Anderson Capital Advisors, which made a stunning debut in the PDI 50 by jumping from 69th spot to 31st, proving that while the ranking is exclusive, it’s not impenetrable.

The five key takeaways

1. The top 10 remains largely untouched…

A stand-out feature of this year’s ranking was the fact that the names in the top 10 remained largely unchanged. The one exception is Cerberus Capital Management, which dropped three places from eighth to 11th, despite its five-year fundraising total growing from $24.3 billion to $28.4 billion. The firm missed out on a top 10 spot by a very thin margin; Intermediate Capital Group edged ahead of Cerberus by a mere $132 million as its total went from $20 billion to $28.5 billion.

The fundraising totals drops by a significant amount after the top 11. The runner-up to Cerberus was Newark-headquartered PGIM, which raised a comparatively modest $20.8 billion, $7.6 billion behind Cerberus. TPG Sixth Street Partners, at 13, is a further $5 billion behind PGIM, illustrating just how impenetrable the top 10 – which accounts for half of the capital raised by all firms in the PDI 50 – can be.

2. …but there is a lot of movement among them

While the gulf between the top 10 and the rest of the ranking is large and growing, competition among the leading firms is extremely tight. As a result, this year has seen a big reshuffle and most managers are separated by $1 billion-$2 billion or less – a small figure in the context of the largest funds. The narrowest gap is the $34 million that divides third place (Lone Star, $37.7 billion) and fourth place (Ares, $37.66 billion).

This is part of the reason last year’s front-runners – M&G, Apollo and Oaktree – have each fallen five places. Another reason is cyclical. A firm’s five-year fundraising totals can change dramatically as flagship vehicles become too old to be counted or new giant vehicles are raised. This partly explains why this year’s front-runner, Goldman Sachs, has seen the biggest jump within the top 10, rising from ninth place.

3. Consolidation reveals a more mature market…

The fact that there is now a clear set of dominant players in the ranking is evidence of a mature market. The brand names and track record built up by the first movers has created a self-perpetuating market where managers can leverage their scale and network to raise ever-larger funds. Not only can these managers call on a large community of return investors, but new LPs looking to make their first commitment to the asset class are drawn to the relative security of an established manager. Their scale also gives them the ability to cater to limited partners that have substantial amounts of capital to deploy.

Another factor strengthening the hold of the biggest firms is that LPs will often understand and value the culture of the firms they have previously invested with. New LPs also know the leading funds have better resources to generate superior dealflow across multiple jurisdictions and to invest opportunistically. These managers will also typically have better reporting and the experience to manage conflicts and issues when they arise. There is also an argument that these managers are sufficiently diversified and therefore better insulated from an eventual downturn.

4. …though this could come at a price

One of the biggest issues that came up at PDI’s Capital Structure Forum in London this year was the potential negative impact of capital consolidation. Large investment platforms bring obvious benefits but also mean less diversity in the market. The argument goes that the biggest managers are under pressure to deploy large amounts and so gravitate towards bigger deals where private debt can be a solution that replaces high-yield and syndicated loans.

That means less capital is going to the lower end of the market, particularly where there are more opportunities for non-sponsored deals. These deals can be more labour-intensive and time-consuming for a manager and hence less attractive to general partners. A decrease in non-sponsored deals perpetuates the private debt industry’s over-reliance on the dealflow coming from private equity sponsors. This may not be a problem amid a thriving private equity market, but private equity is subject to cycles. If that market takes a turn for the worse, non-sponsored deals could be an important plan B.

5. BDC rankings prove less dynamic, for now

In addition to our annual PDI 50 ranking, we regularly publish a list of the largest public and private business development companies in the market. The BDC ecosystem – which does not factor into the PDI 50 five-year fundraising totals – is far smaller and as a result we see less movement among the top-ranked firms. This is perhaps more apparent than ever in 2018. In the case of public and non-traded managers there are two clear leaders: Ares Capital Corporation and Franklin Square Investment Corporation, respectively. In both cases these managers lead their categories with more than $12 billion in BDC assets. Ares’s assets are nearly double those of its nearest competitor, Prospect Capital, whereas Franklin Square’s assets are nearly three times those of Corporate Capital Trust.

However, new US legislation in the form of the Small Business Credit Availability Act allows BDCs to increase their borrowing capacity from a 1:1 debt-to-equity ratio to 2:1. This could potentially allow the corporations to massively grow their balance sheets. The question is
whether this change leads to more competition in the market or just results in the biggest players getting even bigger.

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