Q2 2021
Fundraising analysis
Direct lending more than proves its resilience
Michelle D’Souza
Appetite for private debt investments is growing far and wide
European direct lending fundraising volumes rocketed in H1 2021, marking an accelerated return from a sluggish 2020. Market participants tell Creditflux that they are bullish on prospects for the rest of this year, praising the asset class’s resilience in the face of crisis.
Fundraising through the first six months of 2021 matched the €22 billion raised across the whole of last year, according to Creditflux data. Ares Management, for its part, has raised exactly half of this year’s total so far, off the back of the largest ever European direct lending fund. Ares Capital Europe V closed at its €11 billion hard cap in April. With leverage, it has a whopping €15 billion to deploy.
Other large fundraises in Q2 included Hayfin Direct Lending III (€5 billion) and Park Square Capital Partners IV (€1.8 billion). Capza also raised €2.3 billion in total for two private debt funds: Capza 5 Private Debt and Capza Flex Equity.
Blair Jacobson, co-head of European credit in the Ares Credit Group, says the experience of the pandemic bore out the fundamental thesis of the firm’s direct lending underwriting process.
“As one of the first participants in European direct lending, we appreciate the resiliency of our strategy, where we selectively back good companies with good sponsors through controlling the loan structures and having controls and covenants,” he says. “When investors and borrowers saw how well the asset class responded to the impact of COVID as it played out month over month, it gave them a lot of confidence in the downside thesis of the asset class.”
European direct lending fund activity in Q2 2021
Select funds in the market
The breadth of LPs investing in the asset class also continues to expand, with Ares noting in the announcement that 65 investors (more than one-third out of “nearly 180” overall) were new to the firm.
Sources say they have noticed an increase in interest from insurance companies looking to invest in private debt, and that LPs from new regions — including Asia and Australia — are also contemplating private debt. They have also taken note of greater appetite from retail and high-net-worth channels.
Investor relations and marketing professionals, however, have a much more onerous job on their hands. Alongside the challenges of virtual fundraising, sources perceive an increased focus on due diligence as LPs weigh up how best to draw distinctions between managers and offerings.
LPs went into defensive mode during the first wave of the pandemic, pausing commitments to managers and focusing their attention and resources on internal issues.
European direct lending fundraising
David Ross, managing director and head of private credit at Northleaf Capital Partners, says LPs have always been good at due diligence but, since the pandemic, investors are homing in on certain areas — for example the use of leverage, flexibility of documentations, and GPs’ ability to manage liquidity. Sources suggest that the increased due diligence will lead to a consolidation of lenders in the next 12-18 months.
One London-based direct lender says: “LPs used to be investing in private credit out of their alternative investments basket — but they are increasingly investing through their fixed income basket.
“Those are substantially bigger and, because of that, investors are thinking of the asset class as more of an extension of fixed income and are expecting timeliness and transparency of detail on the underlying borrowers that they would get from a fixed income manager.”
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European Direct Lending Perspectives
Q2 2021
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