Big is beautiful as the flow of fund closes dries up

While new fund launches have slowed down significantly, those funds that are in the market are bigger than ever.

Since the global financial crisis in 2008, private debt has seen a remarkable rise from being a relatively niche proposition focused largely on mezzanine to a serious competitor to banks.

We’ve also seen many new entrants to the private debt market, and the number of debt funds to close ballooned to more than 200 a year between 2015 and 2017, according to PDI data. This run came to an end in 2018 when just 173 funds closed. The first quarter of 2019 registered just 20 fund closes and, while closes-per-quarter usually increase as the year goes on, this is a much lower number than we have become accustomed to.

However, the amount of capital raised in Q1 2019 is comparable to previous first quarters at $32.6 billion and the average fund size is a whopping $1.6 billion. The trend we are seeing in the private debt sector appears to be consolidation of power. Large and established fund managers can command the loyalty of their limited partners and raise larger vehicles with each vintage.

Looking at the top funds to close so far in 2019 confirms this. Two dominate the scene: Lone Star Fund XI ($8.2 billion) and BlueBay Direct Lending Fund III ($6.7 billion) accounted for 46 percent of total capital raised between them. Of the 20 funds, five raised more than $2 billion and seven were worth more than $1 billion.

Strategic variation

Furthermore, while the largest fund is Lone Star’s special situations vehicle, the top funds cover a range of different strategies from distressed to mezzanine to senior debt. There has been much talk of investors looking to capitalise on distressed opportunities in anticipation of the economic cycle turning, but funds of all types are still able to command substantial sums from LPs looking to diversify.

This trend is also confirmed by the consolidation among alternative asset managers. The biggest firms are looking to get even bigger and are prepared to buy other managers to achieve this. This was most recently illustrated by Brookfield’s acquisition of a majority share in credit specialist Oaktree. Although the deal is structured so Oaktree will remain an independent entity for some time, the firms’ combined assets are enough to rival the long-time largest alternatives manager, Blackstone, with around $500 billion of assets under management.

More evidence of the growing fundraising power of larger managers can be seen in Intermediate Capital Group’s most recent financial results, which show the firm increased its assets under management by 29 percent in just one year – including its €4.5 billion ICG Europe Fund VII, which closed in November 2018.

The phenomenon of fewer managers with larger funds is not limited to private debt. Data from PDI’s sister titles Private Equity International, PERE and Infrastructure Investor show similar trends are emerging across all the alternative asset classes. LPs are looking to streamline their GP relationships and exhibit a flight to quality in anticipation of growing economic uncertainty and volatility.