(Bloomberg) -- The €4.5 billion ($4.9 billion) loan backing Blackstone Inc. and Permira Holdings’ buyout of European online classified company Adevinta ASA this week didn’t just smash records. It also highlighted a new trend that sees institutional investors offer portions of the debt direct to the borrowers.

They’re doing so because pension funds and sovereign wealth funds — among the largest pools of capital on the planet — are increasingly eager to cut out the middle-man when investing in the $1.6 trillion private credit market. 

As a result, managers of direct lending funds risk becoming victims of their own success, as their investors decide to seek for themselves the lucrative double-digit returns that can be on offer. Such moves will also make it harder for investment banks to win back the profitable business of buyout financing once dealmaking returns in volume.

The Canada Pension Plan Investment Board (CPPIB) provided the largest chunk of the Adevinta private loan, while Singaporean sovereign wealth fund GIC contributed the third-biggest piece, according to people with knowledge of the matter who weren’t authorized to speak publicly.

GIC, CPPIB, Blackstone and Permira declined to comment. Normally, both CPPIB and GIC act as limited partners — LPs in industry parlance — and provide funds to private capital managers, or general partners, to deploy.   

“As investors become more sophisticated and understand the risk they’re taking, they’re able to take it on a proprietary basis rather than doing it through a fund,” said Jeffrey Griffiths, co-head of global private credit at Campbell-Lutyens & Co Inc. 

Private equity fund managers themselves are bringing LPs into their deals, said Karen Simeone, a managing director at private capital investor HarbourVest, meaning that they are playing an increasingly large role in private credit. 

“Sponsors want to know the mindset of the owner of that paper and it works for the LP return profile,” she said. This benefits the sponsor in terms of supplying patient capital for their deals and also offers LPs potentially improved returns.

It’s not the first time that either CPPIB or GIC joined a fund manager to invest in a private credit deal and they’ve even invested alongside Blackstone before, the people with knowledge of the matter said. But Adevinta is a unique step and a possible herald of more to come.

“Co-investment programs are a very important tool for some LPs,” said Daniel Roddick, founder of adviser Ely Place Partners Ltd. “They’re often done on a no-fee, no-carry basis so it helps bring down the overall fee structure.” 

But direct investment by LPs means more competition for private credit funds that are already battling for the scant deals being done — M&A is muted, limiting the opportunities for buyout financing, which is the bread and butter of direct lending. It’s something that financiers will have to get used to.

“You’re definitely going to see more activity from additional LPs in taking pieces of direct loans or participating in large pieces of direct loans,” Griffiths said, adding that it’s “a trend that is only going to continue, and, I predict, become more prevalent.”

Week in Review

• Chinese regulators are drafting a list of 50 developers, including China Vanke Co. and Country Garden Holdings, eligible for a range of financing, the nation’s latest effort to put a floor under the property crisis.
• As part of a package of new measures to backstop the real estate industry, the country’s regulators are considering allowing banks to issue so-called working capital loans to some developers.
• Blackstone Inc. sold its first bonds backed by private credit loans from its main direct lending fund, in a nearly $500 million transaction that will allow the asset manager to invest more money.
• Private credit firms that provided a risky type of financing for the leveraged buyout of Citrix Systems Inc. are raking in gains on their investment, in sharp contrast to Wall Street banks that have realized some $1.3 billion of losses.
• A quirk in retirement fund accounting is making corporate pensions look particularly flush now, giving them more incentive to cut risk by dumping equities and buying bonds.
• JPMorgan Chase & Co. isn’t expecting much in the way of US economic growth next year, but it will likely be enough for US investment-grade spreads — already near four-month tights — to narrow further and for returns to hit a five-year high by the end of 2024.
• Nomura Holdings Inc. is developing a global strategy to compete in the $1.6 trillion world of private credit. Citigroup Inc. is in discussions to start a new direct-lending strategy by early January.
• A combination of slow growth, gradual interest-rate cuts and heavy refinancing needs in high yield will make investment-grade debt more attractive to hold next year, according to Morgan Stanley
• US regional banks are seeing “permanently” elevated funding costs relative to their major competitors in the wake of the March turmoil that upended the sector and financial markets, according to Torsten Slok at Apollo Management.
• Positive returns are expected in most segments of the bond market next year as fixed income bounces back from a period of underperformance versus equities, according to DWS Group GmbH & Co. KGaA in its 2024 Market Outlook.

On the Move

• Two former Goldman Sachs Group Inc. bankers want to take the private credit revolution from Wall Street to Main Street. George van Dorp and Koen van Vlijmen, who both worked in the American bank’s London office, have built a product that matches small businesses with alternative lenders.
• CQS Asset Management’s Davide Chiesa is leaving the hedge fund to join private lender AlbaCore Capital LLP.
• Jefferies Financial Group Inc. has hired two former Credit Suisse bankers — Yik Ley Chan and Javier Lee — for its private credit business in Asia.
• Sergio Trigo Paz, chief investment officer and head of emerging-markets fixed income at Union Bancaire Privee, said he’s starting an emerging-markets focused macro hedge fund for the bank, a year after leaving BlackRock Inc.

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