Monday, December 23, 2024

The Big Winners From Private Credit’s Boom Are Becoming Clear

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(Bloomberg) — A chasm is forming between the haves and have-nots in the rapidly expanding private credit asset class.

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Intermediate Capital Group Plc this week wrapped up a €15.2 billion ($16.8 billion) European direct-lending fund raise, the largest pool of capital of its kind ever secured in the region. It follows July’s record-breaking haul of $34 billion, including leverage, by Ares Management Corp. for a similar US strategy.

Meanwhile, firms such as Fidelity International and Boca Raton-headquartered Polen Capital have halted their early European direct lending activities this year after struggling to get them off the ground. The contrasting fortunes are a sign that the boom in the $1.7 trillion private credit industry is being enjoyed by fewer and fewer credit managers.

“If you want to talk to the biggest companies then you need the biggest pockets of capital,” Rob Seminara, Apollo Global Management Inc.’s head of Europe, said at the IPEM conference in Paris this past week. “We will continue to see bigger managers grow in scale as they’re much more relevant to the biggest companies in the world. Private credit is a real enabler to them.”

Industry titans such as Blackstone Inc., Apollo and the asset management unit of Goldman Sachs Group Inc. are scaling their franchises into so-called ‘one-stop-shops’ for debt financing, with the ability to offer financing across the capital structure. This plays to their advantage when it comes to relationships with borrowers, according to Seminara.

More Discerning

Investors are becoming more discerning about asset managers because a prolonged period of higher rates has created a double-edged environment for credit funds, where there are higher returns to be won but greater risk of stress for the companies to which they lend. As competition for capital intensifies, several mid-tier fund managers are struggling to raise money for new funds, people with knowledge of the matter said.

Market participants also expect performance among lenders to start to diverge as each manager’s portfolio is tested.

“As markets become trickier to navigate, investors are choosing to back direct-lending funds with good track records, and the scale and capacity to invest through credit cycles,” Mathieu Vigier, co-head of ICG’s direct lending franchise, told Bloomberg News in an interview.

Indeed, money raised through funds targeted to institutional investors, including asset managers and pension funds, is expected to be about flat this year, according to data compiled by PitchBook. About $91 billion was raised from 59 private credit funds in the first half of 2024, the data shows. During the same period last year, 68 funds closed with $98.9 billion.

“Private credit asset managers are transforming the landscape for corporate debt, taking market share both from commercial banks and from the syndicated lending market, but also reaching new borrowers that these traditional intermediaries viewed as too risky,” Jared Elias at Harvard Law School and Elisabeth de Fontenay at Duke University School of Law wrote in a July research paper.

“As a result, there is a small elite club of perhaps a dozen or so asset managers who play an increasingly critical role in corporate finance.”

Week in Review

  • Global bond yields slid to a two-year low this week due to concern over slowing growth in major economies and increasing expectations for interest-rate cuts.

  • A flood of issuance is continuing in the market for junk-rated debt and borrowers are taking advantage of a starved investor base to bring riskier deals, including for dividends and leveraged buyouts.

  • Banks are buying back their Additional Tier 1 bonds at levels not seen before, emboldened by regulatory clarity and a buyer base eager to absorb a record flow of new issuance. Meanwhile, Australia’s banking regulator has proposed lenders scrap the use of AT1 bonds in capital requirements, potentially becoming the first jurisdiction to phase out the securities that were wiped out after Credit Suisse’s collapse last year.

  • Some of China’s most closely watched property developers slid by the most in months, after home sales data underscored a worsening real estate slump.

  • JPMorgan Chase & Co. is leading a historic retreat from preferred shares as Wall Street lenders re-jig their balance sheets ahead of new rules that will be significantly watered down.

  • Hewlett Packard Enterprise Co. tapped the US investment-grade bond market to help fund its pending acquisition of Juniper Networks Inc. Also in the high-grade market, a Blue Owl Capital Inc. fund sold $1 billion of debt, and Oneok Inc. sold bonds less than two weeks after saying it was buying a competitor and a controlling stake in a different company.

  • In the US leveraged loan market, chicken finger chain Raising Cane’s Restaurants LLC sold a $500 million deal after tightening pricing on the debt. Separately, Goldman Sachs Group Inc. is holding meetings with leveraged finance investors to gauge appetite for debt from Wayfair, and Formula 1 priced a $2.55 billion package to help finance owner Liberty Media Corp.’s acquisition of MotoGP World Championship.

  • Goldman Sachs Group Inc. is selling a significant risk transfer tied to a portfolio of about $3 billion of leveraged loans.

  • In the $1.3 trillion world of collateralized loan obligations, hedge fund Chatham Asset Management is launching a platform that will manage and invest in the securities, while Palmer Square Capital Management is launching a pair of exchange-traded funds that will buy CLOs and other assets.

  • TC Energy Corp. will provide compensation to buyers of a C$1 billion ($735 million) Aspen Investments bond deal that failed to close.

  • Discount retailer Big Lots Inc. has filed for bankruptcy protection and plans to sell the firm’s assets and ongoing business in a court-supervised process.

  • Retailer J. Crew is looking to woo investors with a hefty yield of more than 11% along with key investor protections on a $450 million term loan, as it aims to refinance debt.

On the Move

  • Bank of America Corp. named Rashaan Reid head of Americas fixed-income, currencies and commodities sales trading. Reid joined the bank in 2001, and has spent much of her career in the mortgage and securitized sales business.

  • BDT & MSD Partners’ co-head of real estate credit, Adam Piekarski, is leaving the company to start his own investment firm focused on commercial real estate debt.

  • Om Pandya joined Clifford Chance as partner in its capital markets practice in Houston.

  • Long Corridor Asset Management Ltd. has hired Kenny Wu, the former head of China credit research at another hedge fund BFAM Partners (Hong Kong) Ltd.

–With assistance from Kat Hidalgo and Francesca Veronesi.

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