Private Credit Funds Are No Longer Drumming Up So Much Cash

2024-04-05 11:00:00.1 GMT By Kat Hidalgo and Francesca Veronesi (Bloomberg) -

Direct lending funds are having a hard time sourcing cash from their own investors, raising fears that the red-hot private credit market is set to cool. Limited partners are no longer bankrolling private credit funds like they once were, putting some funds in limbo and threatening the survival of others. It now takes a record 20 months to cobble together enough cash to close a new private credit fund, according to PitchBook data. In the heyday of 2021 some funds closed inside of a year. It’s another chink in the armor of a market that’s challenged Wall Street by walking away with its most lucrative leveraged loan deals. The problem is a drought of new buyouts that’s slowed the return of cash to investors, shrinking distributions of paid-in capital, known as DPI. With less cash in hand, the investors at the top of the private credit investment chain are less likely to commit to new funds. “Our clients aren’t rushing to invest in private debt right now,” said William Guilloux, chief investment officer at Cedrus &Partners, an investment adviser to family offices. “Like others, their DPI is constrained in their portfolio. ”Investors committed about $190 billion of cash to new funds in 2023, the smallest amount since 2018 and down 17% from the year before, according to PitchBook. ?The slump has hit mid-tier and less-established managers the hardest. With less cash to put to work and forced to make a choice, investors tend to gravitate to giants with more resources and longer track records. It’s an environment where it’s “much harder for newcomers and anyone outside the premier league,” said Floris Hovingh, head of EMEA debt advisory at Perella Weinberg Partners. “LP fund managers will be inclined to invest in household direct lending names as no one would blame them for losing money to these managers.”?Ninety One Plc’s European Credit Opportunities Fund has gone quiet in the 18 months since its first close. Pan-European manager CAPZA is still raising its sixth private debt fund following a first close in June 2022. A representative for Ninety One declined to comment. A spokesperson for CAPZA said the firm is nearing a close on the fund, without providing more specific timing. For now the slowdown in fund creation hasn’t hindered private credit dealmaking. Direct lenders have yet to spend all the cash they raised during years of rapid growth.?It’s also not being felt at the largest firms. Blackstone Inc., for example, is on course to raise more than $20 billion across three private credit funds, this year. Blackstone declined to comment on fundraising. And while many direct lenders may not be raising new funds as quickly, opportunities to spend their money are also becoming more scarce: volume of private equity deals inked worldwide shrunk 25.2% in 2023, according to PitchBook data, and has yet to pick up. The lean year for M&A is also behind the shortfalls at limited partners: they’re seeing less frequent paybacks, or DPI, because refinancings and secondary sales by private equity firms are drying up. Credit funds have a so-called reinvestment period, typically of as many as five years. During that time, if a loan is paid back, the fund manager can recycle the proceeds back into new investments. After this period ends, managers start to return money to their investors.?Still, hopes that the market can maintain its momentum maybe tested if the fundraising problems persist. Last year the private credit industry swelled to $1.7 trillion, up from about $500 billion in 2015.“There’s just a supply demand imbalance that would take time to fade,” said Guilloux.