Standing on the shoulders of giants

A record-breaking year for private debt fundraising has been enabled by the strength of the private equity market.

How to start the new year with a bang: Yesterday, PDI data revealed that the private debt asset class had its most fruitful fundraising year ever in 2017, with more than $180 billion raised. This beat the previous annual record, set in 2015, by an impressive margin of around $40 billion.

It was no coincidence that our colleagues on PEI were simultaneously announcing that the private equity market had also gone gangbusters last year – collecting around $539 billion, compared with $422 billion in 2016.

Where the private equity market leads, the private debt market follows. According to the latest version of Deloitte’s Alternative Lender Deal Tracker, some 81 percent of direct-lending deals done in the UK in Q3 2017, and 90 percent of deals in continental Europe, were backed by a private equity sponsor.

For all the talk of potential in the non-sponsored market, this shows a striking level of reliance on private equity firms for deals. Moreover, the symbiotic relationship is strengthening. As recently as the first quarter of 2016, the Deloitte data show that the proportion of sponsor-backed direct lending deals on the European mainland was as low as 62 percent.

Our fundraising data also confirmed a trend picked up by last year’s PDI 50 survey of the biggest capital accumulators over a five-year period. Namely, the development of an elite group of firms – such as Apollo, Lone Star and Oaktree – raising ever larger pools of capital. In 2017, despite the landmark headline figure, the number of fund closes during the year was the lowest since 2012.

This should not come as too much of a surprise. Other, more established asset classes – private equity among them – have already witnessed this trend. Its material effect, other than further evidencing private debt’s growing maturity, is to enable the more prolific fundraisers to move beyond their traditional mid-market territory and challenge the banks at the larger end of the leveraged buyout market.

Thanks to their ability to move quickly and provide flexible solutions, non-banks have been successful at building good relationships with private equity firms. If they can also bring greater underwriting heft to the table, the ability of banks to hold their advance at bay may be seriously in question. Not too long ago, private debt funds were forced to fight for the scraps that fell from the syndication table – now they can afford thoughts of sitting at the head of the table as lead arrangers.

In May 2016, GSO Capital Partners raised eyebrows when writing a €625 million cheque for Investindustrial and Black Diamond’s backing of the Polynt/Reichhold merger. Around the same time, Ares Management handed over more than $1 billion in support of Thoma Bravo’s purchase of software company Qlik Technologies.

Sources we speak to have tipped these ticket sizes to be beaten in the year ahead. In lockstep with the private equity market, private debt is going large.

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