The Unicrunch — Fundraising highlights private credit divide

Sami Vukelj

30 August 2024•4 min read

The Unicrunch is our US private credit newsletter, in which we break down everything from unitranches to ABL. Sign up for the inside track on this fast-growing market.

Fundraising bifurcation

What comes after the golden age? That was the question considered on the latest edition of Cloud 9fin (which you can listen to here.)

For as some of the exuberance in the private credit market tempers down, reports on fundraising in the asset class show a clear bifurcation between larger players and those less established. Take the recent turmoil at Fidelity International, which exited its direct lending strategies in Europe due to difficulties in fundraising as 9fin reported.

On the other hand, in recent months LPs have been throwing cash at bigger players — particularly at what you might consider household names in the private credit market. Goldman Sachs closed a fund in May with over $20bn of capital raised, HPS’ $21bn fund closed in June, and Ares’ closed a $34bn fund in July.

This is reflective of broader trends in private credit fundraising over the last few years, which shows capital concentrating among the top players. The top 15 managers captured 70% of all private credit capital raised in the US in 2023, up from 63% the year before.

Bigger players have also been acquiring smaller ones, which is also perhaps why so much LP capital is being hoovered up by the big names. The number of new funds reaching a final close has dropped from its peak of 321 in 2020 to only 184 in 2023, reflecting the consolidation across the industry.

So how do smaller funds gain the attention of LPs? One way has been to lean in to the alternative credit strategies that LPs are increasingly seeking out, such as asset-based lending, specialty finance, venture debt, and opportunistic credit.

A proliferation of GPs with dedicated ABL funds, like those launched by Castlelake and Victory Park, have drawn capital commitments from LPs looking to diversify away from traditional corporate direct lending strategies.

This is not much of a surprise. A survey from earlier this year conducted by Briarcliffe Credit Partners found that asset-based lending was the number one strategy that LPs indicated interest in, at 68%.

But the top firms are hardly ignoring these sub-strategies and are making their own moves, like the equipment finance platform Ares launched earlier this year. It begs the question we asked earlier this year: if the big firms dominate direct lending, will ABL be any different?

Rookie season

If being a smaller player is tough in today’s market, starting fresh appears to require an extraordinary effort.

GCM Grosvenor is attempting to help solve that problem as it operates an emerging managers program. Simply put, the firm looks to pair LPs with less-established private markets managers. (You can read more about the program here in an interview with Michael Kirchner, a managing director at the firm.)

For LPs, one of the major benefits in investing with an emerging manager is diversification. This can be important in a private credit portfolio that can easily result in overlapping exposure in upper market direct lending funds, on both a sectoral and borrower basis.

Newer managers, by virtue of their scale, often have to seek out different opportunities with smaller borrowers, which can potentially translate into higher returns (whether it is a riskier strategy compared with investing in the upper middle market remains up for debate.)

And being among the first investors in an emerging manager commands other benefits, such as lower fees and potential for co-investments on individual deals.

For the broader market such programs as GCM Grosvenor’s should help aid with improving diversity in the sector. Last year, 9fin reported on the underrepresentation of women in the industry. Kirchner says the program is keenly focused on investing in funds managed by those from underrepresented groups.