After the party, the hangover

The steep fundraising decrease in H1 2018 may just be a function of the incredible amount of capital alternative lenders collected last year. By Andrew Hedlund

Private debt managers are currently seeking the least amount of capital since 2015 – a fact that could be reflective of the broader fundraising market and a hangover effect from last year’s capital-raising bonanza.

Credit funds in market were seeking $236.2 billion as of 30 June, PDI data show, which is down from the $270.4 billion debt vehicles were targeting at the same time last year and below the $266.6 billion sought midway through 2016.

It’s not surprising that managers are seeking less money, given that private credit raised over $200 billion last year – a staggering sum that was a significant boost to the dry powder piling up within the asset class. As one fund manager explained it: a vehicle’s final closing is something to celebrate until you realise that the capital then has to be invested.

At 2015’s halfway point, credit funds were seeking $203.8 billion – a number that has increased year-on-year by more than $60 billion – likely due to the influx of new market participants looking to cash in on the growth of the asset class. This year, it seems the market may have reached a point of equilibrium; after all, what soars into the stratosphere will eventually come back down to earth.

That equilibrium seems to have a bias towards US-based firms, at least through H1 2018. Some 73 percent of the $61.6 billion raised in the first half of 2018 was by US credit managers.

Most of the 10 largest funds that have held final closes come from those with their main quarters in the US. New York-based GSO Capital Partners took the top spot with a $7.12 billion distressed debt vehicle: GSO Capital Solutions Fund III.

Last year, Europe had a larger presence in the top 10 throughout the first half of the year. Alcentra raised the most with its €4.3 billion Alcentra European Direct Lending Fund II, while Hayfin Capital Management took third place with its €3.6 billion Hayfin Direct Lending Fund II.

A general US tilt should not be unexpected though, as many of the largest alternative asset managers in the world – such as GSO, Apollo Global Management and Ares Management – all have credit operations based in the US.

Eight of the top 10 firms in the PDI 50 – our annual list of firms that have raised the most capital over the preceding five years – are US-based. London-based M&G Investments and Paris-based AXA Investment Managers – Real Assets (taking second and eighth places, respectively) are the exceptions. If the subset is expanded to the top 15, 12 are based in the US.

While private debt has matured rapidly over the past decade, the future growth of the asset class may happen mostly outside of the US. The investor base is quickly expanding beyond the US and Europe, even though much of the deal activity is within those geographies.

All eyes are pivoting to Asia, where some managers have been devoting more resources – Avenue Capital Group recently raised its first Asia-focused fund since 2006 while KKR hired a  new credit head for its Asia-Pacific operations.

This article has been adapted from a PDI contribution to The Lead Left, a weekly industry newsletter distributed by Randy Schwimmer, a senior managing director and head of origination at Churchill Asset Management