Amid that fervor, it seemed like anyone could launch a ‘senior lending strategy’ and watch the cash pour in. It also helped that during the lending environment of the ZIRP era, defaults were extremely low, so lenders could demonstrate a healthy track record. There was little to distinguish funds from each other.

Yet even in the rather niche world of private credit, there are what many would describe as household names — and investors appear to be gravitating in their direction. These are the funds that either pre-dated the GFC or have simply raised the most cash in the years since. They do the biggest deals, and sit on the biggest panels at industry conferences. 

And as more LPs express interest in private credit, these industry behemoths continue to rake in new cash. 

HPS, one of the largest names in the market, this week announced it had raised $10bn for its latest direct lending strategy, across its Core Senior Lending Fund II and parallel accounts. Of that total, some $7.3bn is in the form of equity commitments from institutional investors. 

In a press release, HPS’s chief executive Scott Kapnick noted the fund’s “robust reception” among investors. The firm has already deployed more than half of the cash raised, so it doesn’t seem it’s having much issue putting the money to work. 

Another big name in the alternatives space, Oaktree, announced earlier this year that it was seeking $10bn from investors for its own direct lending strategy. If it reaches that target, then just like HPS it will have raised one of the the largest ever funds in the senior lending space.

Eat the rich

The industry’s big names have also dominated fundraising in junior debt. HPS (again!) recently pulled in $17bn for its junior lending fund, while Goldman’s asset management arm raised $15.2bn and Crescent announced a new $8bn vehicle. 

Just those three funds alone dwarf the $10.5bn raised for senior lending so far this year, according to Preqin (although that number doesn’t include HPS’s latest direct lending fund). 

The attraction of junior debt in today’s rockier lending environment is pretty clear: unitranche lenders are less keen on underwriting at the toppy levels seen in 2021, so sponsors need to add separate junior tranches (or add a PIK component) to achieve the same leverage.

Two such examples: Finastra is weighing up a $2bn second-lien PIK facility, and earlier this year PCF Insurance announced a $500m PIK loan that is subordinate to its existing unitranche facility. 

The story of 2021 and the years prior was that sponsors had the upper hand, using the low rate environment and strong equity markets to win favorable debt terms and compress pricing. Now, debt providers often seem to have the upper hand. As one panelist at the recent DealCatalyst conference in Florida said: “For years equity had eaten debt, now debt is eating equity.”

Clearly, junior capital is having a moment. But while these giant fundraises generate a lot of buzz and attention, they can also give the impression that it’s as easy to raise capital today as it was in years past — and that’s not really the case. 

Recent research from BlackRock shows that investors are still generally bullish on the private credit asset class, but that many of them are hamstrung by the denominator effect. 

Rising rates may add extra yield on the underlying loans, but portfolio limits in terms of public versus private investments are stopping some investors from allocating new money to private credit. 

Some LPs are shifting their rules to account for this — such as CalPERS increasing allocations to private markets — but for many other institutions the alternatives bucket remains small.

Size matters

Does this cast doubt on Preqin’s forecast that the private credit market will grow to $2.6trn in size by 2026? 

It’s difficult to say for certain, especially without clarity on how long the Federal Reserve and other central banks plan to keep base rates this high. But the structural shift towards private debt within the leveraged credit universe continues, and optimism is still in the air. 

It would take a brave soul to suggest that private credit’s bull run is over. That said, circling back to our first point, smaller names may be the first to feel the pressure if and when it comes. 

An advisor recently told 9fin that some of the smaller names in private credit are struggling to get in front of LPs. As investors get more selective, they may gravitate towards larger names — indeed, as we documented recently, many lenders are now prioritizing scale.

The old joke was that when choosing an investment bank, picking one of the big names would absolve you of responsibility if things went wrong. 

Perhaps that adage needs updating for today’s private credit world: no-one gets fired for hiring Goldman Sachs (Asset Management).