A closer look at some of the raises show that bigger firms are still navigating a tough environment.

Take HPS as an example. The firm raised $11.7bn for its prior fund in its Specialty Loan Fund series in 2021, according to Bloomberg. Now it is targeting a $7.5bn fundraise. Similarly, AB CarVal raised $3.6bn for its fifth Credit Value Fund. It is now targeting $2.5bn for its fund due to close this year.

AB CarVal and HPS declined to comment.

Expectations for private credit fundraising were already starting to decline in 2022 after a record-breaking 2021. It makes sense that many fund managers would rightsize their expectations.

In a few months, it could go either way. We could see a flurry of releases and news stories celebrating funds shooting past their proposed targets. Managers could also hit their targets or underperform their goals.

Until then, the market has expectations. And, according to conversations 9fin has had with multiple sources, they have certainly come down.

Reality check

Private credit’s secondaries market is in its nascency but growing. And for with buyers of stakes holding great power, there comes great responsibility.

For as private credit lenders begin to trade positions and look to buy other positions in fellow GPs, there arises a potential conflict of interest. This is specifically true of businesses that have both direct lending arms and secondaries operations: see Blackstone, JP Morgan, and Goldman Sachs as examples.

The conflict comes from whether or not secondaries buyers might get a glimpse into portfolios of competitors and thus gain an advantage for their own direct lending teams. Many secondaries platforms ensure to make a key point in presentations and memos that they are separate operations.

Ares, for instance, took extra precaution in handling this dynamic. Dave Schwartz, who today is the firm’s head of credit secondaries, was previously its co-head of direct lending. He took the decision to step down from the investment committee on the direct lending operation, 9fin reported, in a move to show good faith that the business was aware of the perceived conflict of interest.

This is one of many moves private credit shops will have to consider, and even undertake, to ensure fellow GPs and other players in the market trust their competitors, for perception can be stronger than reality.

The distress test

The question on everyone’s lips is: how are private credit firms handling restructurings?

Interest rates have been high for a while now. There has been the twin pressures of inflation and labor costs. And as 9fin reported last year, interest coverage ratios have been coming down among direct lenders’ portfolio companies.

So it is very likely private credit firms across the board are facing issues, and as 9fin reported, there are overviews of how they’re handling distressed situations from discussions on BDC earnings call.

Nevertheless, funds are finding ways to stave off defaults. As documented by Lincoln International and Proskauer, private credit defaults are actually decreasing.

This is an advantage of private credit compared with public debt markets. Closer relationships with borrowers and sponsors mean quicker engagements can happen. There is no public display of distressed situations or disagreements among lenders. And at the moment, preferred equity is the…err…preferred option for many lenders.

On the flip side, conducting workouts in the shadows could lead to further problems down the line.

For LPs, the question has been how to distinguish between market players. How the firms handle more difficult periods is the best way to separate the wheat from the chaff. And as rates remain high, LPs may soon have their answer.

“We’re going to see more workouts within existing books and a dispersion in private credit managers’ performance based on their ability to fix mistakes,” Rick Miller, CIO of TCW’s private credit group, told 9fin this week.

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