In Private Credit, Bigger Is Better — At Least When Attracting Assets

The ten largest credit funds took in almost half of the money raised last year.

Michael Nagle/Bloomberg

Michael Nagle/Bloomberg

As competition in private credit heats up, larger managers have begun to squeeze their smaller and newer competitors out of the market.

While private credit funds reached a new fundraising record in 2021, less established managers generally had to settle for a smaller piece of the pie. Forty-two percent of capital raised by private credit managers last year was taken in by the ten largest funds, according to Charles McGrath, author of Preqin’s latest Global Private Debt report.

The private debt industry has seen continued growth in assets under management since the onset of the pandemic. Distressed debt, for example, was a big hit for investors interested in betting on a wave of corporate defaults caused by Covid-19. As the market matures, however, the rules of the game are being rewritten by the bigger players. “Just as we see in private equity, experience is a big draw for investors,” McGrath said. “Experienced managers generally raise larger funds and also take a larger share of the market.”

Private debt funds raised $193.4 billion in 2021, up by 14 percent from a year before, according to data from Preqin. Yet the number of funds that participated in fundraising decreased from 255 to 202, raising the average fund size from $663 million in 2020 to $958 billion in 2021. According to the Preqin report, this means that the barrier to entry is rising, creating a problem for first-time fund managers. “Both the number of funds closed by new managers and the aggregate capital they raised fell to levels last seen in the early 2000s,” the report said.

According to figures from PitchBook, private debt managers with the largest fund closings in the second half of 2021 included Oaktree, HPS, and Arcmont. The Oaktree Opportunities Fund XI, for example, raised $15.9 billion for its distressed debt vehicle in November, while HPS and Arcmont raised $11.7 billion and $5.8 billion, respectively, for their direct lending funds.

As investors continue to hunt for attractive yields in the current low-rate environment, Preqin expects 2022 to continue to be a good year, especially for established private debt managers. Fifty-seven percent of institutional investors plan to increase their allocations to private debt in the next three years, according to a January survey by SS&C Intralinks, a financial technology provider based in New York. By 2026, global private debt funds will manage a total of $2.7 trillion in assets, according to Preqin.

In terms of specific private debt sub-strategies, McGrath believes that direct lending funds will emerge as a key player in 2022. “Direct lending is favored for its high yields, floating rates, and comparatively lower volatility, all of which are advantages in a rising-rate and inflationary environment,” he said. “Furthermore, these qualities appeal to investors looking for stable presence in their portfolios, compared to the more opportunistic distressed and special-situation sub-strategies.”