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In August, a group of lenders partnered on a $5.3bn loan to refinance financial software group provider Finastra Group’s debt.
This particular deal involved the refinancing of leveraged loans. That’s something that we’ll no doubt see more of in the coming months as some of the debt of private equity-based portfolio companies comes due; Wall Street banks are pulling back from lending, so private debt funds will become an increasing feature in the space, at least, until interest rates start to come down.
There’s plenty of money being raised that will satisfy this demand. In just the past few days, the Wall Street Journal ran one story that said that Brookfield and Societe Generale are partnering on a $10+bn private debt fund and Bloomberg ran another that said Barclays are partnering with AGL on a fund. Large, multinational firms are moving into the space, and others are buying their way in – Man Group recently completed its acquisition of Varagon Capital Partners that it announced in July.
Those that have been following this blog will know that I cut my teeth in the private debt world, and we at Fundviews Capital support many private debt managers, particularly newer ones that are launching their own fund in the space. And a common theme that we’ve observed – one that’s running parallel to the growth of the private debt market – is that, similar to the private equity space, there has been an increasing interest in these strategies from the wealth management / RIA space.
The interest is, of course, tempered by a few things. First is macroeconomic – with interest rates being higher at the moment than they have been for a while, liquid debt products are much more attractive to those not only in the RIA market but in the institutional market more generally. Second is the process. Private markets funds tend to come with more paperwork and less standardisation – this article from Bain & Company spells out the challenges rather well.
But still, the interest is growing, and it’s largely due to the increasing knowledge of both the wealth manager and their client – the individual investor. The former is being forced to learn more about private debt firms and products as their clients are asking more – and better – questions.
The private debt market has been dominated by larger firms – in some ways, its evolution mirrors that of the PE market in the 1990s when larger firms were doing most of the deals. But smaller firms and funds are now entering the industry, like in the 2000s in the buyout market, and consequently sub-categories of private debt are emerging.
We’re seeing the smaller funds – let’s say, sub-$1bn – are outperforming in this asset class because they can do smaller deals with less competition compared to the institutional crowd. But what’s different now is that these funds are being launched amidst a more difficult fundraising environment in which regulators are putting ever more onerous requirements on GPs and investors are conducting more thorough due diligence, which means that a robust middle- and back-office infrastructure that de-risks the investment (from the investor’s perspective) is vital for any manager that wants to successfully launch a private debt fund.
It might not be too long before we see the first $10bn private credit deal. And of course, the larger end of the market will be mostly the playground of the institutional LPs. But the smaller end is growing, and the wealth managers are coming. And until there are industry-wide tech options used by both GPs and LPs to make allocating easier, those GPs that have a robust middle- and back-office infrastructure are the ones that will be higher up the RIA chain for an allocation.
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Gregory Poapst is a Managing Partner at Fundviews Capital. Connect with him on LinkedIn here.
Fundviews Capital is a full-service end-to-end Fund Management Platform. Our platform provides a complete end-to-end solution for asset managers or wealth managers to structure, launch, operate and grow their professional investment funds. You can launch a fund in a matter of weeks, not months, and with minimal capital outlay – not only reducing the risk of launching a fund but also maximizing your chance of success. Once launched, you will find that a dedicated team of professionals is just a phone call or email away at all times, handling all aspects of the back and middle office for your fund.