Reaching the finish line

They were at opposite ends of the spectrum, and were also very different strategically. But the fundraising success enjoyed by US behemoth GSO Capital Partners and UK-based Kreos Capital augured well for the private debt industry – both funds received strong support from new investors as well as old.

GSO’s latest fund, GSO Capital Solutions Fund II, raised a hefty $5 billion by the time its final close was officially announced in early September. GSO hit its upper limit, raised more than 50 percent more than its first ‘Capital Solutions’ vehicle, and received “demand well surpassing the fund’s … hard cap”, the firm said.

You’d expect nothing less of course from a firm of GSO’s calibre and resources. Since its merger with The Blackstone Group, the firm has grown exponentially and now manages more capital than Blackstone’s private equity group.

Then there’s Kreos Capital at the other end of the size spectrum. Its fourth ‘growth debt’ fund raised €240 million after the firm raised its target from €200 million in response to investor demand.

Kreos’ vehicle has a very different strategy to GSO’s latest. ‘Growth debt’ means a focus on providing relatively short-term, no-covenant loans to SMEs to aid them in their growth.

The Kreos team told Private Debt Investor a key element in the firm’s fundraising success was its track record. This comes as no surprise – LPs frequently cite track record as the most important factor when evaluating a manager. They also said investors had been impressed by the team’s longevity and the firm’s resolute adherence to its core strategy; again, both typical responses when investors are asked what they look for in a manager.

An interesting trend however, particularly for smaller managers, appears to be the increasing importance of a first close. Managers, including Kreos, have suggested that many LPs want to see not only evidence of commitments from other LPs but also deals under a firm’s belt before they’re willing to commit. Is this simply evidence of a herd mentality, or does this suggest scepticism about the asset class?

It’s more likely to be simple prudence – especially for managers who can’t point to a series of predecessor funds, evidence of an ability to raise capital and then deploy it successfully into high quality deals is always going to help sway potential investors. There appears to have been a hardening of LPs’ attitudes towards first closes though, which makes building momentum in a fundraise even more important. Some market participants do believe that perception is a major factor however. “If you’re perceived to be running a successful fundraising, LPs flock in,” one manager argues. “If you’re perceived as struggling, nobody wants in. It’s pretty binary,” he adds.

Managers do need to be careful about how they market a fund though. A first close is a blessing, but it can be a curse if the firm then starts doing deals that are off-piste compared to what marketing materials are promising.

“One of the difficulties in fundraising these days is that it takes longer than before,” says one manager who recently concluded a very large, very successful fundraising. “Previously, you could pitch one strategy, and by the time you’d held a first close and started doing something a bit different to that strategy, well you’d probably almost be at a final close. Nowadays, however, it catches up with you. Either you’ve oversold the opportunity and then haven’t done any deals to back those predictions up, or you’ve not been able to deliver the promised returns, at least without doing something quite different,” the manager adds.

The mantra, one supposes, should be “Under-promise, over-deliver”.