PUBLISHED: 01 NOVEMBER 2017
The growth of private debt in recent years has been phenomenal, as the latest top 50 manager ranking shows.
Our more observant readers will notice that this year’s ranking has expanded significantly. While in previous years, we have featured the top 30, the industry has now reached the scale where a list of the top 50 managers is more appropriate. This is a reflection of how far the industry has developed as demands from both investors and borrowers have evolved.
“The private credit fund market has deepened considerably over recent times as investors seek income at a time of low interest rates and as banks have been less able to provide debt than in the past,” says Gregg Disdale, head of illiquid credit at Willis Towers Watson. “Managers clearly recognise both this funding gap and the demand for income from investors, so it’s an obvious market to grow assets under management.”
Over the space of just one year, the five-year fundraising totals for the top 50 in the industry have increased substantially. In 2016, the five-year figure stood at just over $541 billion; in 2017, the equivalent number stands at $653 billion, PDI data show. As investors have shifted parts of their allocations from other alternatives and fixed income, the private debt market has been one of the biggest beneficiaries.
“The market has deepened as LPs have started to recognise that private debt is an interesting alternative to fixed income and complementary both in returns and frequency of distributions to traditional private equity – for senior risk, they could achieve 500-1000bps above liquid markets and see their capital returned faster and more consistently,” Warren Hibbert, Asante managing partner, says.
Our ranking this year also point to other important trends in the market.
1 LARGER MANAGERS ARE CONSISTENTLY RAISING LARGER FUNDS…
While there has been some churn in the top 10 managers, many of the names remain the same.This high- lights the brand and track record first-movers have built-up in the post-crisis years. “The market is self- perpetuating,” says Disdale. “Those that have already raised large funds can then go on to raise further large funds – they have demonstrated to LPs that they can deploy substantial amounts of capital and that then opens them up to those LPs that have large sums to invest.”
Jeff Davis, partner at Eaton Partners agrees. “Institutional investors like scale,” he says. “Many LPs prefer to stay in an ecosystem they know and continue backing a firm that is working well. They understand these firms have superior deal flow and know how to manage conflict. They like the similarity in reporting and likely value the culture of that firm.”
2 … WHICH IS NARROWING THE GAP AT THE TOP OF THE LEAGUE
Where once the top two or three managers were some way ahead of the rest, our 2017 rankings show a significant narrowing of the gap between the firms in the top 10. Last year, for example, Lone Star was way ahead of the others, with a total exceeding $42 billion, while HPS, in eighth place, had raised nearly $23 billion. This year, while Lone Star remains at the top of the league with nearly $38 billion, number eight, AXA Investment Managers, is hot on its heels with over $31 billion.
This also reflects the status of many of the players at this end of the market among LPs. “The scale of growth at the large end of the manager spectrum is well correlated with the consistency of their returns, tenure of investing and the perceived resource they can bring to bear on their portfolio – ‘a safe pair of hands’,” says Hibbert.
“Relative scale perpetuates absolute scale. If LPs know what they are getting from the largest players, even if the returns don’t always beat those at the smaller end, they will continue committing due to a perceived safety factor.”
3 MORE NON-US PLAYERS ARE CREEPING UP THE RANKING
While the US private debt market has seen considerable growth over recent years, it is European firms that have expanded most.Where in previous years the top 30 list included a handful of non-US players (there were three last year), this year’s top 30 includes seven Europe-headquartered firms, with five more moving into the top 50.
“There are more ex-US credit managers of scale in recent years,” says Davis.“European credit managers have proven that there’s a clear and scalable market opportunity in their region. Having a local presence matters, and these European platforms have a proven edge against the biggest and best US credit platforms who continue to broaden their geographic footprint.”
Other notable non-US managers have risen in our rankings, too, including Hong Kong-based PAG, which comes in at number 35 and Toronto-headquartered Brookfield Asset Management, which sits at 38.We expect still more to feature in next year’s ranking.
4 PRIVATE EQUITY PLAYERS ARE EXPANDING THEIR PRIVATE DEBT BUSINESS
Private equity fund managers are increasingly featuring in our ranking as they seek to diversify into other alternatives and grow assets under management. While they have always been present in our top 30, this year sees more firms that have historically focused on private equity raising larger private debt funds over the last five years, including many based in Europe. In many ways it’s a natural progression.
“There is a tendency for private equity firms to ramp up on the credit side,” says Leon Stephenson, partner at Reed Smith. “They already have the infrastructure in place to raise funds and service LPs. While other newer entrants may seek to start out small with $100 million-$200 million funds, private equity can raise much more with their existing infrastructure and LP relationships. They also have a brand that they can capitalise on.”
Disdale agrees. “The private equity players have expanded into credit in part because of the demand from investors and the market, in part as there are some synergies with their core business and, of course, because it’s a good way to grow AUM. As a generalisation, it is easier to scale in credit than in their traditional business which is more focused on finding idiosyncratic opportunities and where deployment is lumpier.”
5 SPECIALIST FIRMS ARE PROVING MORE ATTRACTIVE AS THE MARKET MATURES
While not a significant feature of the top 50 ranking, specialist fund managers are now starting to garner more capital. In our list Macquarie’s infrastructure debt arm has risen 53 places over the last year to number 28. This reflects an increasingly mature market as investors fine-tune their allocations and seek out differentiated strategies.
“There is appetite for more specialist strategies, such as energy and infrastructure,” says Hibbert. “Given that debt players don’t have the same element of control over their investment as equity houses do, LPs like funds that can minimise risk because they understand the sectors they are investing in and in many instances sector specialist debt investors have board seats or observer rights. It’s also attractive for management teams, who appreciate fund managers that can speak the same language when it comes to what is best for the growth of the business.”
Overall, our ranking suggests the market has developed beyond its nascent stages to a more established part of the suite of investment options available to LPs, as well as one that borrowers now actively seek out. As Leith Moghli, partner at Reed Smith, says: “The financial crisis identified the inefficiencies of the lending model and the credit funds stepped in. Alternative lending is clearly here to stay.”
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