Acquisitions of alternative credit managers reached a record in terms of the assets under management of acquired firms, a recent report by Gapstow found, and the level of acquisitions is expected to continue in 2023.
Although the number of deals last year – 37 – was in line with the average of prior years, acquired AUM more than doubled to $326 billion of AUM from $140 billion in 2021. Private lending-centric firms accounted for nearly half the activity, Gapstow, an alternative credit advisory firm, said. Alternative credit acquisitions include the purchase of ownership in an investment manager or investment management contract whose primary capability includes one or more of traded credit (high-yield bonds, broadly syndicated loans, emerging markets debt, either long-only or long-short); structured credit; private lending; and distressed debt. AUM are the target’s total AUM, even in a minority purchase.
Moreover, the three largest transactions accounted for more than 40 percent of 2022’s total AUM. They were Guardian Life’s minority purchase of and partnership with mid-market direct lender HPS; Franklin Templeton’s acquisition of Alcentra; and First Eagle’s purchase of Napier Park, with respective AUM of $80 billion, $39 billion and $19 billion. However, the report notes that the top three concentration comports with the historical average, and doesn’t account for 2022’s record volume.
Last year, 15 acquisitions were of firms specialising in private lending, accounting for $161 billion in target AUM, or about half of total acquisition volume.
Meanwhile, CLO acquisitions at $33 billion of acquired AUM “dwarfed” the historical average of $5 billion, owing largely to Carlyle’s purchase of CBAM, at $15 billion AUM, the largest ever, as well as Investcorp’s acquisition of Marble Point ($8 billion) and Owl Rock’s purchase of Wellfleet ($7 billion). Motivations ranged from the desire to acquire capability to the desire to build scale.
In a reversal of the years from 2015-2018, when 58 percent of acquisition activity was financial in nature, capability acquisitions accounted for 66 percent, or $214 billion of total acquired AUM in 2022, a record. Gapstow believes alternative credit management is at an inflection point. For much of the post-GFC period, these managers were largely insulated from the challenges facing the broader investment management industry because of the asset class’s rapid growth. But now, they are starting to confront these challenges, including fee compression and margin erosion, undifferentiated products from many providers, allocators’ desire to work with fewer managers, and slowing growth.
The shift in acquisition, Gapstow notes, reflects the new reality, with adding investment capabilities creating scale in capital raising, business management, and operations.
This year, Gapstow sees acquisition activity maintaining its heady pace, with an increase in acquisitions of firms who currently have minority owners predicted.