Why it shouldn’t be assumed the feast is over

The first-quarter fundraising figures for private debt showed declining appetite from LPs, but they may have just been resting between courses.

You will already have read plenty about what a volatile year it’s been so far, and about the multiple reasons why. So it was arguably no surprise that private debt fundraising produced a violent swing of its own – plunging from a record high of $109.5 billion last year to a low of $15.4 billion in the opening quarter of this year, according to PDI Research & Analytics. 

If replicated in the next three quarters, this would put 2016 on course to be the worst fundraising year for the asset class since 2010. But few expect that to happen. Indeed, it already isn’t (if that makes sense). As journalists keen to convey a perception of having our fingers on the pulse, we noted with some irony that even as we posted our tale of fundraising gloom, fund close announcements were steadily flowing into our inboxes.

Later on that same day, we were able to report on EQT’s €530 million closing of a mid-market direct lending fund. Just one day later, Park Square wrapped up a subordinated debt fund on €1.2 billion. Then, over the following days, the likes of Audax, Ares Commercial Finance and Venn Partners all reached fundraising landmarks of their own.

It was the stream of fresh fundraising news that seemed to make sense more than the pause that preceded it. After all, we detect no reduction in investor appetite for the asset class. In the especially hot distressed debt segment, Prequin figures show 32 North America- or Europe-focused vehicles were in the market targeting a combined $44 billion in January 2016; compared with 20 such funds targeting $21.5 billion two years prior.

Yesterday’s breaking news from PDI that Carlyle Group had held a $576 million first close on its latest distressed fund appeared to underline the point that the strategy remains a capital magnet.

But those fundraisers tempted to think raising capital will be a breeze should temper their optimism. We are being told that investors have pretty much had their fill of generalist direct lending funds and consider that the market is overloaded with “me-too” offerings. There is also a growing frustration with shared, club deals where the value-add is hard to identify.

There is a sense that unless you are either a brand name or well differentiated – or preferably both – fundraising could be a long haul. So, no room for complacency. Equally, little need to fear that the relative absence of fundraising achievements in the first quarter was anything other than a temporary and short-lived slowing of momentum.