May 5, 2022

Private Credit’s Biggest Firms Are Crowding Out Newcomers

Mary Biekert and David Brooke, Bloomberg News

(Bloomberg) -- The U.S. private credit market has ballooned to more than $1.2 trillion as investors seek higher returns. But it’s the biggest lenders that are attracting the most money, tilting market concentration to a select group and making it harder for newcomers to break in.

Nearly 40% of aggregate capital raised last year went to the top 10 biggest funds, according to London-based data analytics company Preqin. That’s up from about 27% in 2017, showing the increased domination of the largest firms.

Fundraising is running at a rapid clip as well, with lenders typically launching a fund every 15 to 18 months, an acceleration from the historical norm of three years, according to a report from Intertrust Group. That’s motivated established firms to launch even more new funds, according to the fiduciary services firm. Of the 2,800 individual funds launched in the last five years, 80% were from existing lenders, it added.

Among the biggest players, Blackstone Credit raised $32.6 billion for its business development company last year, while HPS put together a $15.4 billion fund. Those with larger scale are competing more and more with Wall Street banks by providing multi-billion dollar loans to help fund leveraged buyouts as they look for opportunities to deploy cash.

Read more: Blackstone Leads $4.5 Billion Unitranche Loan for H&F Buyout

Some private lenders are more focused on the lower middle-market where companies usually have maximum Ebitda of about $35 million. These firms, such as Crescent Capital Group, Adams Street Partners and Monroe Capital LLC, have also amassed huge sums, making it tough for new entrants to break into this area of the market as well.

“The biggest barrier to entry is experience,” says Venkat Srinivasan, global head of private funds at Intertrust. “It’s a complicated market so investors want the comfort of a manager with a lot of know-how. That can be an experienced manager in a big firm or a manager who has earned their stripes and branched out on their own.”

So far, investors who’ve concentrated their money with top firms have seen steadier returns. Since 2009, funds with more than $1 billion in assets under management were less volatile compared to smaller-fund peers, according to data from Preqin. The internal rate of return for funds exceeding $1 billion saw a 4.4% variation between the best- and worst-performing vehicles between 2009 and 2018, while those smaller than $200 million varied by 6.9%.

The growing consolidation isn’t such a surprise, especially as loan portfolio managers sought easy safe havens during the pandemic, said Jess Larsen, chief executive officer at Briarcliffe Credit Partners. But he doesn’t think this is a long-lasting trend. In fact, it’s already changing based on conversations he’s having with investors, who are finding it easier to meet with smaller firms once again as pandemic restrictions ease.

Some new private credit funds are finding their way into the market by launching specialist strategies such as litigation, sports, supply-chain and aviation finance, the Intertrust report noted. Peter Gleysteen, chief executive officer at AGL Credit Management, said during a panel discussion Tuesday at the Milken conference that “the number of borrowers has vastly increased.”

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