It is more than 18 months since the onset of covid-19 and the private debt fundraising market has shown itself to be remarkably robust. Notwithstanding a dip in the reported industry-wide fundraising numbers, which belies the experience of many of those working on the front lines, the resilient performance of portfolios through the pandemic and the continued appetite of limited partners in private debt fundraisings during the period have demonstrated the enduring and indeed growing appeal of the asset class.
As such we continue to see existing credit sponsors seeking to diversify and ambitiously grow their offerings as well as significant appetite from non-credit sponsors wanting to expand into credit. There have been some clear observable trends and hot topics that have developed during this period, as the asset class continues to mature, evolve and become more complex.
The largest sponsors have been taking a bigger share of the capital raised, driven both by a pre-pandemic trend of ‘flight to quality’, which was already in evidence, and multiplied by a pandemic-triggered ‘flight to safety’, in each case favouring the bigger names with the more established multi-cycle track records.
The pandemic accentuated this trend through the ‘remote only’ fundraising environment, which made onsite due diligence meetings with new LPs difficult (and sometimes impossible) to arrange. The emphasis has therefore been on the strengthening and deepening of pre-existing GP/LP relationships. Recently, however, we have seen some return to historical patterns with interactions with new LPs as covid restrictions continue to ease in different parts of the world.
A further point to note here is that the consolidation trend is clearly observable in the appetite for private debt managers to grow their platforms through strategic acquisitions of teams and businesses. Some recent prominent examples have involved the likes of Ares, Blue Owl, Bridgepoint (owner of PEI Media) and ICG. We predict more strategic transactions.
2 European direct lending
Mega is a term that was previously used to describe only the big private equity funds but which can now safely be used to describe numerous European direct lending vehicles – including those recently closed by Ares and Blackstone Credit, and with the latest iterations from Arcmont, Alcentra, ICG and Hayfin still to come. The attraction of the scale of such businesses to borrowers, sponsors and investors reflected a pre-pandemic trend that has been accentuated for those private debt platforms that managed to avoid the sectors worst hit by covid: the flight to safety for those with the added benefit of a good senior secured investing story to tell.
Of particular note is the way many sponsors in direct lending have managed to integrate a wide array of different structuring solutions to boost LP allocations to their overall direct lending programmes. These include: multiple currency and leverage options; the use of dedicated overflow funds; the set-up of co-investment funds and single investment co-investment structures; the strategic use of separately managed accounts and ‘funds of one’ with different fee and/or carried interest rates; and the use of different structures which preserve better regulatory capital treatment of LP commitments for certain types of investors (an area that has seen particular change in the past 12 months).
This year appears to be the long-awaited inflection point for private debt secondaries, which had been heralded before the pandemic hit. Many of the big names in private debt have recently set up specialist credit secondaries vehicles, joining the likes of Pantheon and Tikehau Capital, which are already operating dedicated vehicles in this area. There is further evidence of the clear and widening appetite for private credit secondary activity, including the recently closed Ping An/Coller secondaries deal – the world’s largest private credit secondaries transaction to date, and Apollo’s much talked-about decision to launch a credit secondaries unit.
4 ‘Retailisation’ of credit strategies
Something well known to US sponsors, which have for some time been accessing retail investor capital in various credit strategies through business development companies, 2021 will also be an important year for seeing this trend move to Europe.
Historically it has been challenging to access similar pools of European retail capital and to ‘thread the needle’ on the tax and regulatory challenges associated with it. But recent innovative developments on the structuring and marketing of such products across Europe mean there has been a definitive surge of interest in the area with European products that can access this market.
5 Open-end/evergreen structures
A topic many have discussed in the past couple of years – but in practice something that has been explored more often than executed – the most recent interesting development here is the increased interest in open-end and evergreen structures by blue chip sponsors operating illiquid private debt strategies.
Models vary, but the key points that concentrate minds in these discussions are the terms of liquidity offered to investors; the rules around appropriate outflows/redemptions; and the basis upon which performance fees/carried interest can be calculated and paid.
No list of trends or hot topics would be complete without mentioning ESG. Following the EU’s Sustainable Finance Disclosure Regulation, sponsors are being more thoughtful about articulating their ESG message to their LPs. Discussions about integrating ESG into investment decisions, data collection, reporting, margin ratchets and objective key performance indicators are now more important than ever.
As recently reported by LCD at September’s LMA Syndicated Loans Conference, delegates estimated that roughly half the leveraged loans completed in 2021 included some sort of sustainability language, or a margin ratchet linked to ESG-related KPIs or third-party scores.
We are therefore unsurprisingly seeing more sponsors looking to launch products that more explicitly promote ESG goals, as well as sponsors with already strong ESG credentials looking to place even greater emphasis on this as part of their fundraisings.
James Board is a partner in the London office of law firm Simpson Thacher & Bartlett