A series of mammoth investor tie-ups aimed at financing corporate buyouts is upending the world of direct lending, a corner of the credit market once dominated by boutique funds.
Tuesday’s announcement of Mubadala Investment Company’s new $3.5 billion direct lending partnership with Barings follows the Abu Dhabi sovereign wealth fund’s earlier $12 billion venture with Apollo Global Management. Last week also saw Credit Suisse reveal its new multi-billion dollar direct lending partnership with the Qatar Investment Authority.
Growing scale, driven by voracious investor appetite, is what has seen private credit balloon into an $850 billion market. The tie-ups guarantee investors access to private credit, while the managers get an immediate burst of firepower. In the case of Credit Suisse, and to a lesser extent Apollo, it’s a way of accelerating from an almost standing start to rivaling the size of the biggest direct lenders. Many private credit shops have spent a decade building up the capacity to make $1 billion loans.
“It’s an absolutely natural development,” said Jeff Griffiths, principal and co-head of private credit at Campbell Lutyens, which advises managers on raising capital from investors. “I’m surprised actually we haven’t seen more of it earlier with respect to larger investors taking an ownership position in a manager and then giving that manager capital to invest.”
Read more: Billion Dollar Deals See Private Credit Step Out of the Shadows
Doing Deals
Europe's private credit managers are steadily ramping up deal-making
Source: Preqin
Sovereign funds are not the only large investors buying into direct lending. The announcement of the Credit Suisse deal came on the same day that the Toronto-based private markets specialist Northleaf Capital Partners Ltd revealed its sale of a non-controlling, 49.9% voting and 70% economic, stake to a mutual fund adviser and a life insurance company.
David Ross, a managing director and head of private credit at Northleaf, said that his firm’s partnership with IGM Financial Inc. and Great-West LifeCo Inc. will help broaden the breadth of its investor base.
“We have a partner that will help us grow by investing balance sheet capital in our funds and by enhancing our distribution reach through their advisor capabilities,” he said.
For IGM and Great-West, the agreement gives them access to private markets that can prove difficult for smaller investors to approach, in particular the mutual fund investors that IGM advises. Northleaf also covers several other private markets including private equity and infrastructure.
“The advisory component is very important,” said Ross. Aside from expanding the firm’s distribution network, he added, the move ensures its clients are getting the right advice.
While the fee boost from fresh capital is attractive for lenders, for investors the benefits are more opaque. The terms are not public so it’s not possible to compare fees or promised returns to industry averages.
Teaming Up
Sovereign wealth funds are among the investors most likely to co-invest
Source: Preqin
Despite the potential drawbacks, the private credit market is likely to see more such tie-ups, according to Griffiths.
“On the one hand, you have investors that need and want that mid-single digit return,” he said. “Then you have on the supply side, the continuing story of banks doing less leveraged lending and someone having to come in and do the deals.”
(A previous version of this story corrected the size of the stake Northleaf sold to IGM Financial and Great-West LifeCo.)
— With assistance by Kelsey Butler
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September 24, 2020 at 04:04PM
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