Raising capital is perhaps the greatest challenge facing new debt fund managers. First, they need to convince investors of the merits of private debt.Then, they need to persuade them to transfer allocations from other parts of their portfolio.
There are more than 170 private debt funds currently in the market globally. Collectively, those funds are chasing commitments totalling almost $100 billion, according to Private Debt Investor’s research and analytics division. A hitherto relatively minor part of the alternatives landscape is fast becoming a major feature.
There are sizeable funds within that overall total, from Shanghai International Group’s $8 billion vehicle, to Oaktree Capital Management’s latest, a $4.9 billion-target fund.
Investors are evidently warming to this relatively new asset class. The $5.7 billion New Hampshire Retirement System, for example, recently announced a 10 to 15 percent allocation to private debt within its alternatives portfolio. Elsewhere, Pennsylvania Public School Employees’ Retirement System has committed more than $943 million to private debt funds in recent months.
“We are being flooded with proposals to invest in debt,” says one Paris-based institutional investor. “Debt managers are in a better situation than private equity managers, so the story does sound compelling. Most of us in Europe are however fairly conservative and favour established players.”
And therein lies the crux. For the raft of new managers springing up to capitalise on the dislocation in the credit market, finding a way to work around the track record problem is key to a successful fundraising.
Established managers with a proven ability to generate returns are understandably better able to convince investors that they can generate regular yield. “Their longstanding relationships to a large number of investors and ‘brand name’ recognition can help them to mobilise capital,” says Scott Church, partner at placement agency Rede Partners. “The larger, global firms rely on close relationships with large institutions and tailored solutions, often in separate or managed account form.”
Bigger, established firms can also boast sizeable in-house investor relations teams. With such an infrastructure in place, they are able to raise large sums very quickly compared to start-ups for whom the road to fundraising success is long and laborious.
Rede’s recent successes include helping to raise AnaCap Financial Partners’ second-generation credit opportunities fund at its hard cap of £350 million after only a six month active fundraising campaign. Part of AnaCap’s success was due to its tight focus and willingness to seek external support, Church believes. “Increasingly, the more focused or targeted ‘niche’ debt fund managers are using specialist consultants and placement agencies to increase the effectiveness of their campaigns,” he says.
“The whole concept of risk and return is being reassessed by investors,” explains Church. “With all the pressure on returns in conventional buyouts, investors are starting to realise that they might benefit from more downside-protected strategies like private debt, and are willing to consider longer lock-up structures.”
“Domain expertise in private debt is still in development; private equity teams have not traditionally spent much time on it, and some of the more enlightened consultants are now focusing in the space across liquid fixed income, hedge funds and private debt PE in a less ‘silo’d manner” adds Church.