The steady decline is felt differently by firms, as some struggle to fundraise, while others boast ever larger fund sizes. For instance, last month, 9fin reported on layoffs in Fidelity International’s European direct lending strategy following a period of fundraising difficulties.

At the same time Goldman Sachs’ $13bn closing last week puts it among the largest funds ever raised targeting private credit market investments. Ares pulled in $13.3bn for its fifth European direct lending fund in 2021; HPS raised $10bn for its second Senior Lending Fund in 2021.

If nobody gets fired for hiring Goldman Sachs, maybe the same could be said about Ares or HPS in private credit. And indeed, such a big fundraise may be part of a flight to familiar names in the space by LPs.

"There has been a ‘flight to quality’ to larger and more established GPs, as many LPs are concerned about committing capital to GPs that are less proven,” Rush Harvey, director, private capital advisory at Raymond James, told 9fin.

Running counter to that narrative is the success some smaller funds have in raising money for more specialized strategies. One example of that is Sagard's recent $741m closing, a fund that predominantly invests in non-sponsored companies.

The tradeoff, however, with investing in a first-time fund of a smaller manager is the extra assessment required to ensure you make the right decision. Yet the higher payoff may be worth the extra effort.

"Sub-$1bn funds make sense for lots of LPs who are comfortable with illiquidity risk being the same as larger funds but are willing to do the necessary due diligence to capture potentially higher returns that smaller funds can offer," Harvey said.

I bet you think about ABL

The lower fundraising activity this year and its concentration among heavyweight firms in vanilla direct lending strategies are not exactly new. But as this picture persists, investors are even more concerned about tracking risks and returns when making commitments to a fund.

The bigger appetite of LPs for lower risks without giving up the returns might be laying the ground for asset-based lending, or ABL, to have a larger share in portfolios and be the new hottest thing in private credit for the next five to seven years in private credit, according to 9fin sources.

“We're seeing that asset-based lending is top of mind in the LP community,” Jess Larsen, founder and CEO of Briarcliffe Credit Partners, said.

The increasing interest in ABL funds stems from, as the name implies, its asset-specific nature. Investors like the idea of not having to worry too much about how the company is doing from a cash flow perspective in the next few years, and if something goes wrong those assets should cover the loan’s cost basis.

It’s a common strategy for lending to industries such as aviation, technology, construction, and manufacturing, and is used for a range of purposes from expansion to equipment leasing and financing.

Currently, ABL is still mostly done by banks. However, changes in banking regulations related to capital requirements could alter this situation in the long term, which has generated an optimistic view in the market that around $1.5tn in asset-based loans could shift from banks to private credit.

And if more LP money goes to ABL funds, there could be a shortage of GPs with sufficient expertise, Larsen noted.

“Whereas, in direct lending, there are far too many players,” he said.

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