Private Debt Investor 50: The market deepens – by Vicky Meek with quotes from Jeff Davis
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."