Despite market turmoil, big investors pour billions into private credit
Big investors are pouring billions into private credit funds as large institutions seek to profit from the loss of smaller retail clients. North American direct loan funds, which aim to attract institutional clients, raised at least $16 billion in the second quarter, according to Preqin data. These funds are part of the wider private credit market and provide loans directly to businesses without banks as intermediaries. The three months ended June 25 were the second-highest fundraising quarter in four years for such "closed-end" funds, which raise money from investors only once and have a limited duration. The data shows that despite some large defaults and concerns about the sector's over-reliance on the software industry, large investors remain confident in this part of the private credit market. "Retail funds have been pulling out of private credit as they price in lower loan return expectations for 2021 and 2022," said David Colla, global head of credit investments at Canadian pension fund CPP Investments. But he added that "returns are still substantial" and that the withdrawal of retail money "has left a gap in private credit markets that institutional capital is filling." Group, Ares Management and Some of the largest private investment groups, including HPS Investment Partners, are meeting with investors to try to attract capital for new flagship funds. Executives at Apollo Global moved up the fundraising for their latest flagship direct loan fund by six months to meet market demand and launched the fund to potential investors last week, according to a person familiar with the matter. These funds have not yet closed and are therefore not included in Preqin’s second-quarter numbers. Brad Marshall, co-head of Blackstone Group's $45 billion flagship private credit fund, said many investors expect returns to rise, especially as outflows from retail-focused investment vehicles limit the amount these funds are willing to lend. “Periods of volatility are generally the best time to invest capital because people are nervous, capital structures are more conservative and pricing is wider,” he added, referring to the additional interest or “spread” that lenders are able to charge above base rates. Demand from institutional investors contrasts with large outflows from funds targeting small retail investors and wealthy individuals. from apollo to Private investment groups and other private investment groups have restricted redemptions from such funds, which faced more than $22 billion in redemption requests in the second quarter. "Institutional investors appear to be quite cautious in their approach to direct lending," said one private credit executive. "New deals have slightly lower leverage, slightly tighter documentation requirements and wider price ranges. Institutional investors are seeing exactly these dynamics: The market is getting better, not worse." Maine government disclosures show that the state’s public pension fund approved an investment commitment of up to $375 million in February to support Blackstone Group’s latest direct loan fund. The New Jersey-based investment agency, which manages one of the largest pension plans in the United States, has proposed putting up to $600 million into an investment vehicle managed by private credit specialist Golub Capital. The strong performance of the U.S. economy has boosted optimism among institutional investors, while interest rates could start to rise if Federal Reserve policymakers try to curb inflation. Higher interest rates will push up returns on floating-rate private debt. "They want more," John Zito, co-president of Apollo Asset Management, said last month of institutional demand for private credit. "When they see the headlines, they think, great, this is going to create a lot of excess spread for us and give us an opportunity to invest."