Private Debt News Weekly Issue #23: Fundraising Challenges and New Frontiers
Private Debt News Weekly Issue #23: Fundraising Challenges and New Frontiers
Market Adapts as Traditional Fundraising Slows and Firms Explore Retail Avenues
Introduction
Welcome to this week's Private Credit Weekly. As the $1.7 trillion market faces fundraising headwinds, we bring you crucial developments reshaping the private credit landscape. From innovative fund structures to strategic partnerships and emerging market trends, this concise briefing provides institutional investors with essential insights into the evolving world of alternative lending.
Market Dynamics and Strategic Moves
The private credit market is experiencing a significant shift in fundraising dynamics:
Global private-credit fundraising is declining for the third straight year. According to PitchBook Data, overall capital collected fell to $215.4 billion in 2023, a 12.4% decrease from $245.8 billion the previous year. As of August 22, 2024, credit fund sponsors had raised $118.8 billion, suggesting a further slowdown.
PitchBook predicts that 2024 private debt institutional fundraising will roughly equal 2023's total of $214.6 billion, significantly behind the record $300 billion collected in 2021. This plateau in institutional fundraising is forcing private credit investors to look elsewhere for growth, particularly towards retail investors and insurance companies.
In the first half of 2024, $90.8 billion was raised across 59 private debt funds, compared to $98.9 billion across 68 funds in the same period of 2023. This data doesn't include Ares Management's record $33.6 billion US direct lending flagship fund closed in July.
Despite the fundraising slowdown, private-credit managers increased their dry powder to $506 billion by the end of 2023, up 4.1% from $486 billion the previous year, though still below the 2020 peak of $525 billion.
Jeffrey Griffiths, global head of private credit at Campbell Lutyens, attributes this trend to challenges in investor allocations due to significant exposure to private equity and venture capital, which haven't returned as much cash as expected in recent years.
These trends highlight the challenges faced by private credit firms in attracting new capital, particularly from institutional investors, while also underscoring the significant amount of capital still available for deployment.
Strategic Moves and New Product Offerings
As traditional fundraising avenues face headwinds, private credit firms are exploring new strategies:
Apollo Global Management and State Street Global Advisors announced a partnership to launch an exchange-traded fund (ETF) and other products focused on private credit. This venture aims to make private credit investments accessible to individual investors. The ETF will invest at least 80% of its assets in investment-grade securities in public or private markets, with private investments limited to 15% of the fund's net assets.
BlackRock is teaming up with Partners Group to offer wealthy investors access to private markets through a model portfolio. This move is part of BlackRock's push into the more lucrative business of private investments. The product will be available early next year to advisers and wealth-management clients with at least $2.2 million in net worth excluding their primary residence.
Blue Owl Capital is tapping the US high-grade bond market, looking to sell a long five-year note with potential yields around 2.6 percentage points over Treasuries. The proceeds will be used to pay down debt under its revolving credit facility, asset-backed security, and other secured financings (Bloomberg).
RoundShield Partners closed a new $1 billion fund to invest in asset-backed private credit, exceeding its fundraising target by nearly $150 million. The fund will primarily focus on real assets in Western Europe, such as hospitality, student housing, residential, social infrastructure, renewable energy, and other operating real estate.
Intermediate Capital Group Plc has raised €15.2 billion for a European direct-lending fund, the largest of its kind ever to close in the region.
These strategic moves and new product offerings demonstrate the industry's efforts to diversify funding sources and appeal to a broader range of investors, including retail and high-net-worth individuals.
Market Trends and Emerging Opportunities
Several key trends are shaping the private credit landscape:
Private credit firms are increasingly targeting insurance companies and retail investors for growth. With institutional interest plateauing, firms are turning to vehicles designed to appeal to these alternative capital sources. Some, like Blue Owl Capital, have acquired insurance asset managers, while others are creating separately managed accounts for insurers.
Synthetic risk transfers (SRTs) are gaining traction. Toronto-Dominion Bank is exploring a $300 million debt offering tied to a $3 billion portfolio of corporate loans. This highlights the growing use of SRTs to manage regulatory capital constraints. Globally, SRT issuance is on pace to hit a record high of $28 billion to $30 billion this year, according to Chorus Capital estimates.
Private equity firms are showing interest in the pharmaceutical sector. GTCR is in advanced talks to buy Stada Arzneimittel AG, with private credit funds discussing at least €1 billion in payment-in-kind loans to help finance the potential buyout. The deal could value Stada at roughly €10 billion.
Asset-backed private credit continues to attract investor interest. RoundShield's successful fund close demonstrates ongoing demand for strategies focused on real assets in Western Europe. The fund received commitments from existing investors and ten new investors, including private and public pension funds, insurance companies, and family offices.
The expected decline in interest rates may impact the appeal of private credit. As private debt primarily comprises floating rate instruments, its relative attraction may diminish versus fixed income as a source of total return in a declining rate environment. However, PitchBook's report suggests that the asset class is still expected to deliver compelling risk-adjusted returns compared to other, riskier private and public market strategies.
These trends highlight the private credit market's adaptability and the ongoing search for new opportunities in a challenging fundraising environment.
Conclusion
The private credit market is evolving rapidly, presenting both challenges and opportunities for institutional investors. Key takeaways include:
Traditional fundraising channels are facing headwinds, prompting firms to explore new avenues for growth, particularly in the retail and insurance sectors.
Innovative fund structures and strategic partnerships are emerging to tap into retail and high-net-worth investor pools, as exemplified by the Apollo-State Street and BlackRock-Partners Group collaborations.
The market is seeing increased interest in specialized strategies, such as asset-backed lending and synthetic risk transfers, which offer unique risk-return profiles.
Despite fundraising challenges, significant dry powder remains available for deployment, indicating continued potential for deal activity.
The interplay between interest rates and the appeal of private credit will be a crucial factor to watch in the coming months.
As the private credit landscape becomes more complex, institutional investors must stay informed about these developments to effectively navigate the opportunities and risks in this dynamic asset class. The ability to adapt to new fund structures, identify emerging opportunities, and understand the evolving regulatory landscape will be crucial for success in the evolving private credit market.