Pushing the envelope: Fundraising in 2022
Fundraising last year hit record levels as mega funds poured into the asset class. And 2022 could see more of the same.
There's no stopping private credit fundraising in Europe. At the start of last year, Debtwire surveyed the market to gauge expectations of what was to come in 2021. As much as 94% of respondents foresaw European-focused direct lending funds raising more than EUR20 billion in the year. And these optimists were proven right.
In 2021, a total of EUR36 billion was corralled for the strategy across the region, a more than 70% gain on the previous year and EUR1 billion shy of the previous record set in 2019.
However, this success belies a notable trend: capital is concentrating in the hands of the few.
In addition to Ares' bumper EUR11 billion raise were multi-billion EUR final closes from the like of Intermediate Capital Group, which secured EUR8 billion in December for Senior Debt Partners IV, as well as Arcmont Asset Management's EUR5 billion haul for Arcmont Senior Loan Fund II, closed in November.
Last year, only 16 funds secured a final close, which is below the 18 raised during the chaos of the first year of the pandemic. It also marks a significant decline on prior years. However, this puts the mean European fund size in 2021 at EUR2.25 billion compared with EUR1.28 billion over the four-year trailing average.
It is not just within the debt space that average fund sizes have surged. Larger managers across the private capital landscape have benefitted from COVID travel restrictions, as investors gravitated towards established names and fund managers with which they have existing relationships.
This is because these GPs require less in-depth due diligence. LPs prefer to physically be in the room with managers to discuss their strategy, employee incentivisation structures and succession plans before they make multi-year commitments to new funds. With restrictions in place, LPs have instead had to rely on Zoom and Teams to communicate remotely. This has negatively affected first-time fund managers and teams with limited track records.
In theory, this trend should reverse in due course. If COVID-19 becomes less virulent, as the Omicron variant has shown to be, then travel restrictions should ease and LPs will be more willing to forge new relationships with newer, smaller managers, the recent fundraising concentration trend reverting.
However, even then, there is reason to believe that some degree of remote fundraising may be here to stay.
"The truth is, everyone has gotten very comfortable with it. Do we go back to the old way or do we still do a lot on Zoom? I think it will be a mix. There are pros and cons, but the remote approach has efficiency benefits. Many fundraisings are faster now than they were in the past because you can process due diligence much quicker. It's much easier to organise large numbers of meetings."
-Adam Turtle, Partner, Rede Partners
Direct lenders have taken market share from banks in next to no time. But that influx of capital has its downsides. Competition has increased substantially and with that, inevitably, comes returns compression for investors in those debt funds.
"If you look at private credit allocations, direct lending remains the largest part - it's the staple of that allocation. Investors have often made fairly large bets in that area already, so many of them are looking at adding specialists with a slightly higher return profile. We hear that when we talk to investors."
- Adam Turtle, Partner, Rede Partners
That's not to say the largest direct lenders will lose their winning streak by struggling to raise capital - far from it. Just that direct lending in Europe has gone mainstream and, at the margin, investors are looking further along the risk curve to complement their maturing private credit portfolios.
The fact remains that private debt continues to offer compelling risk-adjusted returns that are not available in the public markets. And private equity has come to depend on direct lenders as their trusted financing partners. The only way is up in the European direct lending fundraising market.