Private Debt News Weekly Issue #24: Big Players Dominate as Fundraising Slows
Private Debt News Weekly Issue #24: Big Players Dominate as Fundraising Slows
Market Consolidation Accelerates Amid Fundraising Challenges and Strategic Moves
Introduction
Welcome to this week’s Private Debt News Weekly, where we delve into latest news shaping the $1.7 trillion private credit market. This edition spotlights three key trends: the ongoing decline in global fundraising, the growing dominance of industry giants, and strategic pivots by major financial institutions. We’ll explore record-breaking fund closes by ICG and Ares, examine BlackRock’s private credit overhaul, and analyze Apollo’s groundbreaking partnership with BNP Paribas. Additionally, we’ll look at emerging risks, including shrinking illiquidity premiums and rising default rates. As the private credit landscape evolves rapidly, understanding these developments is crucial for anyone looking to navigate the opportunities and challenges in this dynamic market.
Market Dynamics and Fundraising Trends
The private credit market is experiencing a significant shift in fundraising dynamics and market structure:
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 (Private Equity News).
Intermediate Capital Group Plc (ICG) closed a €15.2 billion ($16.8 billion) European direct-lending fund, the largest of its kind ever in the region. This follows Ares Management Corp.'s record $34 billion US direct lending fund closed in July (Bloomberg).
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 (Private Equity News).
ICG also secured $1.9 billion for its North America-focused private debt strategy, North American Credit Partners Fund III, which is 50% larger than its predecessor (CityWire).
These trends highlight the growing divide between large, established players and smaller firms in the private credit market, with capital increasingly concentrated among a few major managers.
Strategic Moves and Market Consolidation
Major players in the private credit space are making significant strategic moves:
BlackRock Inc. is overhauling its private credit business, setting up a new Global Direct Lending division under Stephan Caron. The firm manages about $35 billion in direct lending assets, aiming to catch up with industry leaders like Apollo and Ares (Bloomberg).
Apollo Global Management clinched $5 billion in fresh firepower from BNP Paribas SA for investment-grade, asset-backed deals. This partnership is described as "one of – if not the – largest-ever, long-term private credit financings" (Bloomberg).
Oak Hill Advisors provided a $775 million private credit loan to help Carlyle Group Inc. finance its acquisition of auto parts distributor Worldpac. The unitranche loan is priced at 5.5 percentage points over SOFR (Bloomberg).
Virtus Investment Partners filed for an active CLO ETF based on the private credit market, following State Street and Apollo's recent launch of a similar product (Citywire).
These moves underscore the trend towards market consolidation and the increasing overlap between private credit, traditional banking, and public markets.
Market Trends and Investor Behavior
Several key trends are shaping the private credit landscape:
Investors are becoming more selective, favoring larger, more established firms with proven track records. The Alaska Permanent Fund, for instance, works with 15 to 20 private-credit managers and doesn't expect to increase that number (Private Equity News).
The "illiquidity premium" for private credit providers has shrunk from as much as 350 basis points to around 100-150 basis points, according to Matthieu Boulanger of HPS Investment Partners (Bloomberg).
Defaults in private credit are nearing 3%-5%, partly due to covenant breaches and modifications, according to Patrick Dennis of Davidson Kempner Capital Management (Bloomberg).
Some firms are pivoting away from private credit. Fidelity International and Polen Capital have halted their early European direct lending activities this year after struggling to gain traction (Bloomberg).
These trends reflect the maturing of the private credit market, with increased competition and scrutiny leading to a more challenging environment for smaller players and new entrants.
Conclusion
The private credit market is undergoing a significant transformation, presenting both challenges and opportunities for institutional investors. Key takeaways include:
The market is consolidating around a few major players, with record-breaking fund closes by firms like ICG and Ares.
Fundraising is becoming more challenging, particularly for smaller and newer firms, as investors favor established managers.
Major financial institutions are making strategic moves to expand their private credit capabilities, as exemplified by BlackRock's overhaul and Apollo's partnership with BNP Paribas.
The line between private credit and public markets continues to blur, with the introduction of private credit-focused ETFs.
Investors should be aware of potential risks, including shrinking illiquidity premiums and rising default rates.
As the private credit landscape becomes more complex and competitive, institutional investors must stay informed about these developments to effectively navigate the opportunities and risks in this evolving asset class. The ability to identify and access top-performing managers will be crucial for success in the current market environment.