What Leading Asset Managers are talking about in Q124
What Leading Asset Managers are talking about in Q124
What Leading Asset Managers are talking about. Fundraising from TCW, Golub, Apollo, Eiffel Investment Group, Anthill.
👋 Hey, Nick here. If you’re new, this is the 59th edition of my weekly newsletter. Each week I write about private credit insights and fundraising announcements. You can read my previous articles here and subscribe here. Scroll to the bottom, if you’re here for the fundraising news.
This week’s newsletter is a summary of what leading asset managers are talking about. If you haven’t had a chance to read the Q1 earnings transcripts then this post is for you.
I’ve split this post into the below key themes. Feel free to read as little or as much as you like.
Fundraising
Deployment
M&A
Opportunistic Credit - ❤️ I’d highly recommend reading this section.
Spread Compression
Synthetic Risk Transfers
Write Downs
Leverage
The Case for Private Markets
Bifurcation of Credit
Scroll down to the bottom if you’re here for the fundraising news
📚 Quotes of the Quarter
Fundraising
Apollo: “ Double clicking on this third-party fundraising, Credit-oriented strategies were very much in focus and accounted for more than 80% of capital raise in the quarter.”
Ares: “As these markets consolidate, the larger LPs are doing more business with fewer scale managers that can need a broad base of needs…. There’s some pretty good data that shows the concentration of fundraising and deployment in the hands of the largest managers with us near or at the top of the list. So I think, thankfully, we’re not having that experience [weaker fundraising].” (As reported by Bloomberg here)
Deployment
KKR: “Over half of the capital invested in the quarter came from credit, primarily across asset-based finance and direct lending. We are seeing a significant ramp in credit deployment, reflecting the overall growth of our credit platform.”
Blackrock: “Follow-on investment in existing companies continue to be an important source of opportunity for us. About half of the capital we deployed in the last 12 months was to existing companies.”
Ares: “If you look specifically at our activity, I think it was about 70% of our new deals were coming from the existing portfolio, a little bit slower on the new platform side, which was a little bit surprising for us.”
Blackstone: “We've got a lot of momentum, particularly in the investment grade and asset based. The asset backed area is where we're probably most active right now.”
Blackstone: “I use my very scientific briefcase indicator, how many investment memos I'm taking home over a weekend, and it's definitely been trending up”
M&A
KKR : “The M&A market's coming back… The leveraged credit markets opened up in January. We are starting to see this impact all of our businesses, but I'd say in particular private equity pipeline, which is up significantly. There's a lot of activity. What we've announced in Q1 is obviously backward looking, given it takes some time for these deals to close.”
Ares: “One of the benefits of being in the private market is you see that pipeline developing before the M&A numbers become public… We are seeing the ingredients for a pickup in M&A activity, both within the sponsored and nonsponsored part of the world….
Ares: “There is a pretty significant demand from the LP community to see a return of capital, and that should accelerate transaction activity as well.”
Ares: “If you look at the advisory community and you talk to the sell side, they’ll tell you that the shadow pipeline is picking up.”
Opportunistic Credit ❤️ - Highly recommended read
Ares: “One of the most exciting areas within credit, which is what we would broadly call opportunistic credit… In a higher for longer rate environment where asset values have not come down are difficult to transact on and debt service becomes tight. The nature of conversations that we are having with institutional owners of real assets and companies is largely the same, which is I have a high-performing asset that I paid a full price for and a different discount rate and interest rate environment. I need to own it longer in order to realize on my investment thesis, while I’m performing a disproportionate amount of my EBITDA and cash flow is going to debt service and I need a way to create a runway to execute on my business plan, and that’s where most of the businesses here are turning on.
Most of the origination here is trained on that singular issue, which is high-quality assets with “bad balance sheets” that need some form of resolution. And I think opportunistic credit is going to be a big beneficiary of that.
The issue is particularly acute in private equity because if you look at private equity today in terms of the purchase price multiple environment leading up to the run-up in rates, we were close to two standard deviations higher than historical average on private equity purchase price going into the rate hiking cycle.
And so even for the highest quality business, you could argue that there’s probably a 30% gap in the capital structure that needs to get filled today with some kind of solution.
I mentioned the difficulty from a DPI standpoint that the PE market, in particular, is experiencing and the need to get capital back to LPs is very, very acute. And PE now, it’s interesting, there’s about 3.5x the amount of dollars in the ground in the private equity market than there are sitting undeployed in dry powder. And if you go back to prior cycles, that’s typically been at equilibrium where you had $1 in the ground versus $1 uninvested. So in a world where $3.5 trillion is sitting invested in these capital structures and $1 trillion is available for either reinvestment into the existing portfolio or to do new deals, there needs to be some very precise decisions being made by the owners of these companies as to how to use that dry powder.
And so opportunistic credit is a very logical way to bring capital and that’s not dilutive to the equity, but addresses whatever liquidity challenge may exist and gives the company runway. So we’re very optimistic for that part of the market and part of our fundraising strategy for this year is to bring the next vintage fund in that strategy to market this year as well.
Spread compression
KKR : “Investor interest in private credit continues to feel very good. So I think in direct lending, spreads have come in certainly, but if you look at a new direct lending deal, that's still a 10%+ piece of paper.”
Ares: “Spreads have tightened and until we see new activity accelerate, you could expect they may tighten a little bit more from here. They’ve been stabilized over the last couple of weeks, the pipeline would indicate that they get hold here.”
Blue Owl: “So look, spreads.. Yes, there's been spread compression, point of fact… But the spreads we're seeing today aren't that different from what we saw three years ago, and those were really attractive loans and returns too… The key is, do we have really strong credits and are we getting an attractive return, attractive spread for those credits”
Blackstone: “Spreads have come down but on direct lending today are probably 500 over, still pretty good by historic standards… If you're earning 500 over a base rate today, that's 5.5 plus upfront fees, you're earning 11.5% on an unleveraged basis if you put a little leverage better than that”
Synthetic Risk Transfers
KKR: “It is a market we are active in. It fits, in our view, very well with our ABF strategy. I think that activity has mainly been EU focused. It does feel like we are starting to see more activity in the U.S. It also seems like the potential opportunity set could be expanding. I do think the most common underlying assets for SRTs have been in corporate loans, fund finance facilities, consumer term loans. It does feel like banks are beginning to explore opportunities across other asset classes.”
Apollo: “I really want to differentiate because I heard a lot of these calls last couple of days talking about SRTs. This is just making sure that we control the origination on a systematic, structural, long-term basis, not a one-off SRT trade, which is interesting and bespoke, but those are interesting tactical trades. We wake up every day saying, how can we can we ensure that we have as large a pool of long-term assets offsetting those liabilities… We're very involved in that sector. We've been doing it since 2009. Some of the more recent transactions are a little bit blindfold, exceedingly strongly levered, but they are strong IG assets.”
Blackstone: “ SRTs are an area we're very active. I think we're the market leader today… One of the advantages we have is the strength we have across asset ownership and also corporate and real estate credit. So if we do these with bank partners, we can go through them in detail. The most active area has been subscription lines to date, which as you probably know, subscription lines to private equity firms have had virtually no defaults over the last 30, 40 years. So we like that area.
When we work in investment grade or noninvestment grade, much of it's been around revolvers, which historically have had much lower loss ratios. And we were able to go through these portfolios and look at the credits we're taking.”
Write Downs
Blackrock: “During the first quarter, our NAV declined 6.4%, primarily due to net unrealized losses on portfolio companies previously assessed, including our investments in two Amazon aggregators, Thrasio and Razor, along with our investment in Edmentum. The write-downs in the first quarter are mostly the result of circumstances specific to a handful of companies, and as we have stated before, we do not believe these situations are any indication of broader credit challenges in our portfolio. The majority of our portfolio companies continue to report revenue and margin expansion, with many generating sustained performance improvements.”
Leverage
Apollo: “We run ADS, I believe, with the lowest leverage in the industry. Could we produce higher rate of return, higher dividend? Of course, we could. But we know that particularly as we're introducing an entire marketplace, institutional and retail, to the notion of private markets that they should experience this the same way that the smartest institutions in the world have experienced it and not have returns artificially manufactured through leverage or otherwise.”
Apollo: “The time to be levered is when assets are really cheap and they're plentiful and available. The time not to be levered is when markets are tight and there's lots of liquidity. It's easy to be seduced into wanting to produce high returns. We've always been focused on trying to produce acceptable returns, excess return per unit of risk.
The Case for Private Markets
Apollo: “The case for private markets is a very compelling case. People used to look to private markets for excess return. Now, they look to private markets for both excess return and diversification. I saw a note the other day from our Chief Economist, better than 80% of employment in the US is in private markets. We think about S&P 500. We think about public markets. We spend so much time talking about them. But investors increasingly are now recognizing that they have exposure to a very small sliver of the economy through S&P 500. My joke is they're all levered to Nvidia, Apple, and Amazon.
Apollo: “To be a $670 billion asset manager sounds like a big number, but the reality is in the scheme of the markets we serve, we're minimal. The notion of doubling our business over the next five years doesn't seem all that daunting. The things we need to do origination, culture, education because to build something that's not sustainable is not what we're interested in doing. If we get periods of market volatility where things are really mispriced and we can put large amounts of capital to work, as historically we've seen at least once a decade, if not twice a decade over the past few decades, you will see those accelerate.”
Bifurcation of Credit
Ares:"There are many people who think that being great in direct lending is maybe easier than it really is. And you’re beginning to see certain managers underperforming, and there could be a little bit of a cautionary moment here where people want to see the credit performance work through their portfolios with certain managers.”
Apollo: “We as an industry have to be very careful to stick to our promise of excess return per unit of risk. That is why investors pay us premium fees, that is why they trust us. This is how they navigate private markets with firms they trust… We will all in the industry discover [that] we are not going to be limited by capital flows. But the taking of capital because you can take it and then investing it poorly is a quick way to destroy a business. I think we've seen lots of examples of that and beginnings of those seeds being set.”
Sources: KKR, Blackrock, Apollo, Ares, ARCC, Carlyle, Blue Owl, Blackstone
💰Fundraising news
TCW, a California-bassed asset manager, launched its $2.5 billion private credit platform. The platform is a partnership with US bank, PNC Financial Services. The joint strategy will focus primarily on directly originated, senior secured cash-flow and asset-based loans to sponsored and non-sponsored middle market companies. More here
Golub announced the final close of its $2 billion credit opportunities fund, GEMS Fund 6. The fund focuses on a series of strategies including stressed middle market loans, credit fund secondaries, NAV loans, CLO liabilities and preferred stock. The Fund is the largest Golub Capital Credit Opportunities fund to-date. More here
Apollo launched its new asset-backed finance fund, Asset-backed credit company or ABC. The fund is a semi-liquid strategy for accredited investors. Apollo expects the fund to be its flagship ABF product similar to its ADS BDC. It expects high single-digit to low-double-digit returns. It will invest in five key pillars: (1) consumer finance, (2) residential mortgage loans, (3) commercial real estate, (4) financial assets and (5) hard assets. More here and here
Eiffel Investment Group, a Paris-based asset manager, announced a first close of ~$540 million for its third Energy Transition infrastructure debt. The fund finances the construction of European green energy production assets and energy efficiency installations. Eiffel Energy has invested ~€2 billion in over 3,000 renewable energy and energy efficiency assets. These assets save over 5 million tons of CO2 annually, and the equivalent of over 5 million households is supplied with green electricity. More here
Anthill Ventures, an India-based investment manager, launched a $100 million hybrid fund. The fund will lend convertible debt to technology and consumer startups in India. More here