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December 2018 / January 2019 | The PDI 50 Ranking Report 1

EDITORIAL COMMENTPRIVATE DEBT INVESTOR: THE PDI 50 RANKING REPORT

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Each year we publish our PDI 50 and each year we witness the growing con-solidation of the industry. The 2018 PDI 50 has been no different. This is now our sixth iteration of the rank-ing, and the second since we expanded the list from 30 to 50 firms.

The PDI 50 tracks all the capital raised by each manager over the past five years through closed-end funds and separately man-aged accounts – a full methodology can be found on p. 28.

With so many rankings to look back on, two main themes are emerging. First is the amount being raised by the PDI 50. The total capital amassed by all funds in the ranking has, unsurprisingly, gone up significantly in recent years as LPs look to bolster their private debt exposure. This year it was up by 8 percent to $708.6 billion.

Second, more than half of this capital – $383.8 billion – is held by managers in the top 10. With such a large gap between these firms and the rest of the ranking, it is unlikely these names will change significantly any time soon. At the same time, competition between them is tight, with some managers separated by just a few million dollars.

Many take this as a sign the market is

maturing. It shows LPs feel increasingly secure with a class of managers that have established brands, strong track records and vast net-works. On the face of it, this is a net gain for the industry as the asset class broadens its appeal among investors.

Not everyone thinks this consolidation is to be celebrated. As explored on p. 10 of this report, some in the industry are con-

cerned that it is impacting diversity in private debt. With managers under pressure to deploy capital, they are looking for bigger deals. An over-reliance on sponsors for dealflow could also keep private debt’s wagon permanently hitched to the fortunes of private equity.

How big a problem this could become will only be revealed in the next downturn. Until then, much of the industry’s fate resides in very few hands.

Enjoy the report

Andrew WoodmanSpecial Projects Editor

The PDI 50 Ranking Report | December 2018 / January 20192

PRIVATE DEBT INVESTOR: THE PDI 50 RANKING REPORT

CONTENTS

6 Economies of scale Competition at the top has never been

tougher. Graeme Delaney-Smith, head of European direct lending at Alcentra, offers insight into the current state of the continent’s deal market

8 Big get bigger The ranking reveals the continuing

consolidation of the market

12 Power players The trend that has seen the list

dominated by a few names has also seen capital become more concentrated in 2018

17 The firms in the fold The PDI 50 is now almost guaranteed

to feature the same firms at the top, but there is plenty of competition for first

18 The close race The names in the top 10 may stay the

same, but the order certainly doesn’t

19 The ranking Which firm raised the most capital over

the last five years?

27 Levelling up New legislation could shake up future

BDC rankings

FEATURE4 Portrait of an industry Every year we run the PDI 50 we get a

clearer picture of where the capital is heading. Here are the key themes

10 The cost of consolidation

The drift of capital towards a small cohort of mega-funds remains a theme for private debt, but at what price?

14 What they said At this year’s PDI Capital Structure

Forum in London we asked some of the key figures in the private debt community their thoughts on the credit cycle and other issues

16 Where the capital comes from

As more capital floods into private debt than ever before, Christian Allgeier, director at placement agent First Avenue, looks at the reason behind the increase in LP appetite for the asset class

ANALYSIS

COMMENT

PDI50

As the private debt industry evolves, so do the demands on private debt managers.

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ANALYSIS

Portrait of an industry Every year we run the PDI 50 we get a clearer picture of not only who the leading firms are but a better understanding of where the capital is heading. Andrew Woodman examines some of the key themes

OVERVIEW

A stand-out feature of this year’s ranking was the fact that the names in the top 10 remained largely unchanged. The one exception is Cerberus Capital Management, which dropped three places from eighth to 11th, despite its five-year fundraising total growing from $24.3 billion to $28.4 billion. The firm missed out on a top 10 spot by a very thin margin; Intermediate Capital Group edged ahead of Cerberus by a mere $132 million as its total went from $20 billion to $28.5 billion.

The fundraising totals drops by a significant amount after the top 11. The runner-up to Cerberus was New-ark-headquartered PGIM, which raised a comparatively modest $20.8 billon, $7.6 billion behind Cerberus. TPG Sixth Street Partners, at 13, is a further $5 billion behind PGIM, illustrating just how impenetrable the top 10 – which accounts for half of the capital raised by all firms in the PDI 50 – can be.

1. THE TOP 10 REMAINS LARGELY UNTOUCHED …

While the gulf between the top 10 and the rest of the rank-ing is large and growing, competition among the leading firms is extremely tight. As a result, this year has seen a big reshuffle and most managers are separated by $1 bil-lion-$2 billion or less – a small figure in the context of the largest funds. The narrowest gap is the $34 million that divides third place (Lone Star, $37.7 billion) and fourth place (Ares, $37.66 billion).

This is part of the reason last year’s frontrunners – M&G, Apollo and Oaktree – have each fallen five places. Another reason is cyclical. A firm’s five-year fundraising totals can change dramatically as flagship vehicles become too old to be counted or new giant vehicles are raised. This partly explains why this year’s frontrunner, Goldman Sachs, has seen the biggest jump within the top 10, rising from ninth place.

2. … BUT THERE IS A LOT OF MOVEMENT AMONG THEM


ANALYSIS

The fact there is now a clear set of dominant play-ers in the ranking is evidence of a mature market. The brand names and track record built up by the first movers has created a self-perpetuating market where managers can leverage their scale and network to raise ever-larger funds. Not only can these managers call on a large community of return investors, but new LPs looking to make their first commitment to the asset class are drawn to the relative security of an established manager. Their scale also gives them the ability to cater to limited partners that have substantial amounts of capital to deploy.

Another factor strengthening the hold of the biggest firms is that LPs will often understand and value the culture of the firms they have pre-viously invested with. New LPs also know the leading funds have better resources to generate superior dealflow across multiple jurisdictions and to invest opportunistically. These managers will also typically have better reporting and the experience to manage conflicts and issues when

they arise. There is also an argument that these managers are sufficiently diversified and therefore better insulated from an eventual downturn.

3. CONSOLIDATION REVEALS A MORE MATURE MARKET…

In addition to our annual PDI 50 ranking we regularly publish a list of the largest public and private business development companies in the market (p. 27). The BDC ecosystem – which does not factor into the PDI 50 five-year fundraising totals – is far smaller and as a result we see less movement among the top-ranked firms. This is perhaps more apparent than ever in 2018. In the case of public and non-traded managers there are two clear leaders: Ares Capital Corporation and Franklin Square Investment Corpora-tion, respectively. In both cases these managers lead their categories with more than $12 billion in BDC assets.

Ares’s assets are nearly double those of its nearest competitor, Prospect Capital, whereas Franklin Square’s assets are nearly three times those of Corporate Capital Trust.

However, new US legislation in the form of the Small Business Credit Availability Act allows BDCs to increase their borrowing capac-ity from a 1:1 debt-to equity ratio to 2:1. This could potentially allow the corporations to massively grow their balance sheets. The question is whether this change leads to more competition in the market or just results in the biggest players getting even bigger. n

5. BDC RANKINGS PROVE LESS DYNAMIC, FOR NOW

One of the biggest issues that came up at PDI’s Capital Structure Forum in London this year, which is explored on p. 10, is the potential negative impact of capital consolidation. Large investment platforms bring obvious benefits but also mean less diversity in the market. The argument goes that the biggest managers are under pressure to deploy large amounts and so gravitate towards bigger deals where private debt can be a solution that replaces high-yield and syndicated loans.

That means less capital is going to the lower

end of the market, particularly where there are more opportunities for non-sponsored deals. These deals can be more labour-intensive and time-consuming for a manager and hence less attractive to general partners. A decrease in non-sponsored deals perpetuates the private debt industry’s over-reliance on the dealflow coming from private equity sponsors. This may not be a problem amid a thriving private equity market, but private equity is subject to cycles. If that market takes a turn for the worse, non-sponsored deals could be an important plan B.

4. …THOUGH THIS COULD COME AT A PRICE


FEATURE

EUROPEAN DEALS

Q Where is the lending competition

coming from?

There are pockets of competition across the market, both from funds and banks. There are lots of numbers bandied around about how many funds there are in the market, but the size of funds raised has often been lower than expected, or man-agers have not been able to move from a smaller first fund to a second larger one. The market has become bifurcated, with a small number of large players, and a large number of small players. There is still competition coming from the banks, but on the other hand, the banks are pull-ing back from parts of the market. They tend to do lower-priced deals which are often club deals – and all that that entails – or big and syndicated. By contrast, we

are targeting more bespoke deals as sole arranger and underwriter.

Q What returns are available in your

market?

In the market we are in, consisting of senior and first lien secured loans, people

talk about an IRR in the high single digits. The use of a conservative leveraged strat-egy is quite appropriate on top of that, because of the low risk, and that can add another three percentage points or so.

Q As a big fund manager, you cannot do

tiny deals. Do you think there is more

competition for larger or smaller deals?

In a counterintuitive way, in terms of funds, the bigger the deal gets, the less the competition, because the number of funds able to do big deals as sole arranger and underwriter is small. However, for bigger deals there is more competition from the syndicated markets and high-yield bonds, but they are very different options from the customised solutions we can offer.

Economies of scale

As the PDI 50 reveals, competition at the top has never been tougher. Graeme Delaney-Smith, head of European direct lending at Alcentra, offers insight into the current state of Europe’s deal market

“IN A COUNTERINTUITIVE WAY, IN TERMS OF FUNDS, THE BIGGER THE DEAL GETS, THE LESS THE COMPETITION, BECAUSE THE NUMBER OF FUNDS ABLE TO DO BIG DEALS AS SOLE ARRANGER AND UNDERWRITER IS SMALL”


Banks like to sell loans on, but we and many other funds like buy-and-hold strate-gies, where we have the capacity to sup-port a business through a buy-and-build strategy. That is where size and scale is important, because we can often supply additional growth capital in future years, on top of what we have initially invested.

Q Why have you stayed in one European

location, when some other managers

have opened new offices?

I think that co-location – having all 24 people in our direct lending team based in the same place – makes for better com-munication and risk management, than having people based in London, Madrid, Paris and Frankfurt. The opportunity to share information and experiences on deals from different geographies is easier. It is better to get up off your chair and walk across the floor to discuss that deal with a person who worked on it, rather than use email or talk about it on the phone.

Although we are all based in London, many of the team are multilingual, so they can work across borders. We have hired people from the German, French, Nordic and Italian markets. It’s a case of having the right people with the right relationships and expertise rather than simply the loca-tion which is important.

Q Many managers do not venture outside

Europe’s biggest cities. Do you see good

potential elsewhere?

We have always looked broadly across juris-dictions. There will be more competition in the large capitals because that is where eve-rybody goes. If you have been in the market for a long time or have well-established people, and are prepared to go to smaller cities, you end up with deals that have less competition. The pricing may be similar, but there may well be less leverage, so the risk-return may be better.

Q Everyone is talking about how to prepare

for the next downturn. Are you heavily

stress-testing potential deals for a downturn?

We are always looking for the downside, and undertaking stress testing, even in good markets, because things can always go wrong.

As we travel further away from the last crisis, people grow more confident about rising leverage multiples, so everybody has to pay more for their target businesses. In other words, you end up with asset infla-tion and a bit of credit inflation. However, we are always aware of where we are in the cycle – the downturn might come next year or in 2020, but it is probably not many years away. Because of this, we are all the more conscious of the need to walk away from deals where we do not like the pricing or documentation.

Documentation is an area where we and investors are focused on these days also. I think in the US there has been a shift toward covenant-light deals even in the mid-market, whereas in Europe there is more push-back. We are aware, however, that some funds are becoming creative, shall we say, about what having covenants actually means. I believe European manag-ers are very much focused on covenants.

Q Do you favour or avoid certain sectors

when lending, especially when prepar-

ing for a downturn?

Yes, we are looking for less cyclical and less volatile sectors. Those businesses where customers or clients find expenditure to be less discretionary. Retail is not a sector we would consider currently given the environment, the chemicals sector his-torically has been volatile depending on market conditions and can be impacted by the volatility of oil prices for example. So, we are very much on guard for these issues and others that can impact performance.

We also avoid those sectors and busi-nesses which are heavily asset dependent, aircraft and shipping spring to mind as more specialised areas. Asset values are more obviously linked to market condi-tions than say a cashflow-based investment with more flexibility in the way it is man-aged, and we have seen quite some volatility historically in those asset-based sectors.

B2B service providers and health-care are sectors that remain attractive, although even within a sector generally well regarded, one has to be conscious of potential volatility of users and funding issues and adjust thoughts on leverage and pricing accordingly.

This perspective on the market and dynamic sector selection is one of the benefits of having come through previous cycles and in having a large and experi-enced team. n

FEATURE

“WE ARE ALWAYS LOOKING FOR THE DOWNSIDE, AND UNDERTAKING STRESS TESTING, EVEN IN GOOD MARKETS, BECAUSE THINGS CAN ALWAYS GO WRONG”


DATA

PDI 50 IN NUMBERS

Big get bigger The PDI 50 ranking reveals the continuing consolidation of the market as LPs seek out established managers

$653bnPDI 50 fundraising total

in 2017

$383.8bnTotal raised by

top 10

$43.2bnSum raised by top

fund manager

$708.6bn PDI 50 fundraising total

in 2018

North American managers in PDI 50

European managers in PDI 50

Asian managers in PDI 50

25%Share of PDI 50 capital raised by firms outside

North America 15% 8%Increase in capital raised by top 10 firms compared with last year

Increase in capital raised by PDI 50 compared with last year

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ANALYSIS

NON-SPONSORED DEBT

While there has been some interesting movement at the top of the new PDI 50, cou-

pled with some jockeying for position at the lower end of the rankings, one clear trend has continued from previous years: the increasing size of private debt manag-ers. Ares saw the most striking increase in its five-year fundraising total, going from $23.8 billion last year to $37.7 billion in 2018. Even Mesa West Capital, which is propping up the index at number 50, has now raised over $4 billion in the same period, 10 per cent more than the $3.6 bil-lion Pacific Coast Capital Partners needed to take the same position in 2017.

Ever-larger managers are an inevitable outcome of private debt’s move from a niche to a more mainstream asset class. It is easy to see the benefits of achieving scale to general partners, but it is unclear if this is wholly positive from a limited partner perspective. Figures quoted at a recent PDI event in London said that 75 percent of LPs either wanted to increase, or stabilise, the number of GP relationships, with less than a quarter looking to see more consolida-tion among their private debt partnerships.

According to James Newsome, the

Berlin-based founder of placement agent Arbour Partners, one major issue relating to the impact of scale in the private debt sector is a decrease in the percentage of non-sponsored deals. In other words, as the private debt world expands, it is increas-ingly reliant on private equity firms for transactions.

“The proportion of private debt capital raised by the top 10 managers has grown and these larger managers say that the opportunity to expand the market lies in

the bigger deals where private debt can be a solution that replaces high yield and syn-dicated loans. Several managers are fighting to join the group in that $100 million-plus loan market,” he says.

“This makes sense from a GP perspec-tive. You can run a $3 billion fund, with 15 positions, at an average loan size of $200 million with a team of 20. A fund providing 15 secured loans to non-sponsored compa-nies, at $20 million per loan, will only be $300 million in size but will need just as many investment professionals on similar compensation, and potentially more local offices. So, the economics for GPs partly explains the lack of progress in the non-sponsored lending market.”

Newsome’s view appears to be borne out by the latest issue of Deloitte’s Alter-native Lender Deal Tracker. According to the report, non-sponsored deals made up just 18 percent of private lending deals in Europe, excluding the UK, in the first quarter of 2018, versus 38 percent for the same period in 2016.

Newsome adds that this trend is having a negative impact on the market with the supply of credit to non-sponsored com-panies falling below the level of demand,

The drift of capital towards a small cohort of mega-funds remains a theme for private debt, but at what price? Aaron Woolner reports

“THE PROPORTION OF PRIVATE DEBT CAPITAL RAISED BY THE TOP 10 MANAGERS HAS GROWN AND THESE LARGER MANAGERS SAY THAT THE OPPORTUNITY TO EXPAND THE MARKET LIES IN THE BIGGER DEALS – WHERE PRIVATE DEBT CAN BE A SOLUTION THAT REPLACES HIGH YIELD AND SYNDICATED LOANS”James Newsome

The cost of consolidation


ANALYSIS

particularly at the smaller end of the market. Given the private nature of the market, Newsome concedes it is difficult to pin down precise figures but he says conversations with private debt managers bear this out.

“You will often hear managers in the lower mid-market say, ‘In our sector we face little or no competition for the type of credit we supply.’ Even discounting for an element of marketing-speak, this cer-tainly does seem to be a healthier lend-ing environment than parts of the upper mid-market.”

The impact of increased consolidation on the number of non-sponsored deals backed by private debt is not universally accepted. Indeed, a recent report published by law firm Dechert in conjunction with the Alternative Credit Council, Financing the Economy 2018, argues the opposite. Fig-ures cited by the report, which surveyed around 100 private debt managers, said that sponsored deals, by number, had fallen from 55 per cent in 2017 to around 40 per cent so far this year.

“This supports the hypothesis that non-sponsored lending is a potential growth area for the industry,” says the report.

EVOLUTION OF THE MARKET

Gus Black, London-based partner at law firm Dechert, concedes that initial responses to the report have suggested it may have underestimated the amount of sponsored activity actually taking place, but he says it does accurately reflect an evolution of both LPs’ and GPs’ approach to the private debt market.

Black says that as LPs have become more familiar with the sector there is an increased appetite for co-investment with private debt managers, while at the same time GPs have been incentivised to set up direct lending platforms as competi-tion for deals increases and margins gets compressed.

“Some debt managers have been build-ing out direct origination channels, so they can do unsponsored lending bilaterally with corporate borrowers, rather than being reliant on a private equity firm to bring them in the back of an LBO deal.

“This has partly been driven by the volume of dry powder, competition for deals and pressure to deploy capital. This route to market means private debt firms may be able to get their capital deployed more quickly without being beholden to their network of private equity firms. As sponsorless origination requires significant infrastructure on the part of the private debt firm, an increase in sponsorless activ-ity seems a natural consequence of more consolidation in the sector.”

If Black is proved correct it would pro-vide some relief for Arbour’s Newsome who says that the structural health of the private debt market is threatened by an over-reliance on private equity sponsors, given the cyclical nature of that asset class.

“A market reliant on private equity activity is just that – exposed to the com-ings and goings of a cyclical borrower sector. If, as many had hoped, large lend-ing platforms with mixed sponsorless

and PE-based lenders had proliferated, our market would be a strong prospect throughout a cycle, as LPs participate in perhaps more complex financings in the general economy when M&A or LBO activ-ity is quiet,” he says.

Irrespective of the impact of the private equity cycle, one obvious concern for LPs facing increased consolidation among pri-vate debt providers is concentration risk. According to Newsome, this is driving some of the larger investors in the sector to look at ways of diversifying their expo-sure to private credit via other instruments, a trend which he predicts could happen within the next 12 months.

“Several large allocators – big insurers and pensions – have told me that they need to look at other parts of the credit complex now. We may see trends emerging next year. As well as a search for opportunity funds that will invest through a cycle, LPs are mentioning trade finance, invoice or work-ing capital financing. The big marketplace SME lenders are all attracting attention because they provide the diversity and granularity that insurers for example came in to our market to achieve,” adds Newsome.

The bigger players may be looking to broaden their private credit exposure but, according to Tavneet Bakshi, a London-based partner at placement agent First Avenue Partners, the current market and regulatory dynamics mean for most LPs the trend will be towards the larger players.

“LPs have a far higher bar in terms of the institutional platform that they need, irrespective of the number of people in the individual investment boutique. This is in part a result of coming through the GFC but also due to a more stringent regula-tory environment,” she says. “That alone is almost a self-fulfilling cycle such that any GP coming to market now needs to have more substantial working capital and start-ing AUM and that’s very hard to do.” n

18%Of European deals are

non-sponsored (Q1 2018)

Source: Deloitte Alternative Lender Deal Tracker


DATA

PDI 50 FUNDRAISING

The trend that has seen the PDI 50 dominated by a few names has also seen capital become more concentrated in 2018

Power players

The top 10 firms account for half of all the capital raised by the PDI 50

The gap between the largest firms has narrowed significantly since the ranking began

TOP HEAVY

NECK AND NECK

Source: PDI

Source: PDI

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ital r

aise

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n 1-3 n 11-30n 4-10 n 31-50

2014 2015 2016 2017 2018

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$bn)

● 1st ● 5th● 3rd ● 7th ● 9th● 2nd ● 6th● 4th ● 8th ● 10th

20142013 2015 2016 2017 2018

PDI 50 ranking

PDI 50 ranking

GUIDED BY KNOWLEDGE, NOT CHANCE

Learn more about NXT Capital’s Private Debt Funds at www.nxtcapital.com or call Linda Chaffin at 312.450.8082


COMMENT

CAPITAL STRUCTURE FORUM 2018

At this year’s PDI Capital Structure Forum in London we asked some of the key figures in the private debt community their thoughts on the credit cycle and other issues

What they said

“There are a number of geopolitical factors influencing markets but none of them has made a significant dent at this point. Capital raising continues to be strong [and] fund formation is strong. There is more competition because there is more capital chasing deals but our manager clients are very active and seem to be happy with the opportunities in front of them. The big question is the cycle and how people protect themselves against it.”

Tim Houghton head of debt and capital markets, Alter Domus

“We are spending a lot of time with our LPs discussing opportunities that may make sense if we hit a dramatic, or even slight, correction. [We are looking] from a debt perspective at what that might mean for their existing investments and how the GPs that they are meeting with, who are exposed, will fare in that environment. It impacts the type of mandates we take on for fundraising, because we try to match the demand from our investor base. On top of that there has been a significant increase in the number of GPs raising money in private and I think the overwhelming sentiment is that our LPs are increasingly congested in the pipeline of mandates they are reviewing.”

Tavneet Bakshi partner, First Avenue Partners

“For the European private debt market the biggest issue is the private equity market because transaction volumes and value are driven by private equity transactions. If the cycle turns that would have a very big impact on the private debt industry, because what we saw during the financial crisis was that no transactions were made. Of course, I think we are now better prepared in the sense that the capital is financed by limited partners who are committed, so it will smooth the impact of the downturn.”

Ari Jauho partner and chairman, Certior Capital


COMMENT

“I think the developments we have seen over the last year or so are about the amount of capital in the market, borrower terms and covenant-lite [deals]. It certainly makes a lot of sense that we are starting to see a bit of pullback in terms of capital raising to develop a bit of equilibrium in the market. That is healthy for the market, because if terms do come back in line and we do reach the end of the cycle – which everyone has been predicting for a while now – then the damage will be mitigated. I think there is plenty of opportunity in the marketplace. There is still a way to go to truly explore all the use cases for private debt.”

David Waxman managing director, Azla Advisors

“There are going to be people who have a lot of history in this area and feel more confident. They are the guys who remember the previous cycle and will think, ‘When the issues arise we will sort it’. It is a bit difficult to prepare in advance [but] I do think it is worth remembering the phrase ‘the harder you train in peace time, the less blood there is in wartime’, because these situations come pretty fast and pretty thick. I think there is going to be wide differentiation between guys who are a bit over-confident and make typical mistakes that lenders often make versus the guys who are bit more sophisticated and take slightly more targeted advice.”

Richard Thomson founder, RLT Advisory

“[The biggest threat to the European private debt market] is a huge downturn. We can’t tell where that comes from at the moment, there is obviously some geopolitical uncertainty out there. The way we try to address that is whenever we assess a new credit opportunity we assume the downturn happens within year one of the plan and so we try to assess that and model that out to understand [whether] this is the right leverage structure for the right credit. If we think the leverage structure holds up still, then that is something we can take forward.”

James Burns managing director, Crescent Capital


GUEST COMMENTARY

FUNDRAISING

Last year was a record year for pri-vate debt fundraising and although 2018 fundraising looks slightly

lower, we still see a strong demand for this relatively young asset class. Most of this is driven by investors searching for higher risk-adjusted real yield – the holy grail of illiquidity premium – now that traditional fixed income risk-adjusted return is hard to come by in a low inter-est rate environment.

Not only does private debt offer diver-sification and steady cashflows, it is also uncorrelated to the stock markets and tends to present investors with less volatility and uncertainty than public market instruments. Stable performance through market cycles and its increasingly broad, mature universe of asset managers are additional factors of increased support for private debt.

Institutional investors’ knowledge and experience of private debt has grown sub-stantially in recent years. Due to a benign market environment and stable returns, more investors are allocating dedicated capital for private debt where they had once allocated from their fixed income or private equity buckets.

From a geographical standpoint, US-based investors continue to take the lead, particularly when it comes to searching for higher returning private credit strategies. Asian investors – particularly in China, Korea and Japan – have been big alloca-tors to private debt and continue to build their programmes. In Europe, there is more interest in private debt from investors in the Netherlands, Spain and Italy with many aiming to make their first private debt allo-cation in 2019. A rally in the US dollar and

associated forward FX levels and hedging costs have led to an increased aversion to US dollar private debt from non-US investors.

Local government pension schemes con-tinue their fondness for private debt given the funds’ preference for exposure to assets that derive the majority of their returns from income as opposed to capital growth. Moreover, investment sizes have increased since LGPS have proactively teamed up to work together to achieve significant fee discounts and improved control.

We are very conscious of the extended cycle and increasingly consider the private debt opportunity set in the context of the imminent market correction. As a result, we find appetite among our investor base for more flexible credit strategies that are opportunistic and nimble in the face of a dislocation in credit markets. Speciality lending, special situations, asset-backed strategies and distressed debt are coming to the forefront of investor demand as LPs look for higher returning, differentiated strategies that will theoretically fare well in the aftermath of a correction.

The overall capital raised by the PDI 50 – a five-year total – has increased

by 8 percent. The top 10, however, have increased their fundraising total by 15 percent. This shows a trend of ever larger managers raising ever larger amounts capi-tal. But is bigger really better?

There are many advantages to being a large, global, multi-asset GP, including: a longer track record; increased brand aware-ness; market penetration; cross-platform intelligence; and economies of scale. This inevitably leads to a loyal investor base that can support a GP’s growth and expansion. That is why LPs who are new to the space – and are typically more risk averse – will often choose larger platforms over less established GPs.

The concern with larger managers comes as they grow. For example, a spe-cialised GP may have to alter its original investment programme to build the team needed to draw investments from a larger pool. As the GP and fund sizes grow, these alternations to its original remit will con-tinue to a point where the GP may become more conventional and less differentiated.

Smaller managers can bring large GP expertise and experience to their smaller platforms, which can be more nimble and flexible in response to market changes and new opportunities. They are often more efficient and more differentiated, mean-ing for the experienced investor they are a better addition to their portfolio.

As this differentiation is something that investors are looking for we believe there is room for both larger and smaller players. So, is bigger really better? Like most things, there is no simple answer – large and small GPs both play vital and symbiotic roles in good portfolio construction. n

As more capital floods into private debt than ever before, Christian Allgeier, director at placement agent First Avenue, looks at the reasons behind the increase in LP appetite for the asset class and the new areas of investment

Where the capital comes from

Allgeier: investors are looking for differentiation

With every publication of our annual ranking, it becomes

clearer who the major players in the industry are. The list

– which ranks managers by the amount of capital raised

over the previous five years – is now almost guaranteed

to feature the same firms at the top. Even if the order

among them changes, their collective might dominates

the landscape.

Even so, there is plenty of fresh blood in this ranking. No

fewer than 10 firms have made their debut this year or

re-entered having dropped out. Some of these entrants

are already established names within the industry,

including the likes of Benefit Street Partners, Churchill

Asset Management, Twin Brook Capital Partners and

AMP Capital, others are less well-known. Then there are

firms like Kayne Anderson Capital Advisors which made

a stunning debut in the PDI 50 by jumping from 69th

spot to 31st, proving that while the ranking is exclusive,

it’s not impenetrable.

THE FIRMS IN THE FOLD

PDI50


DATA

PDI 50

A close raceWhile many of the names in the PDI 50’s top 10 are unchanged, there has been a lot of movement within it

Apollo 1 Goldman Sachs

Blackstone 5 HPS Investment

Goldman Sachs 3 Lone Star

Ares 7 M&G

● Apollo Global Management

● Ares Management

● Avenue Capital

● AXA Investment Managers

● Blackstone

● CarVal Investors

● Cerberus Capital Management

● EIG Global Energy

● Fortress Investment Group/

Mount Kellet

● Goldman Sachs

● Golub Capital

● HPS Investment Partners

● Intermediate Capital Group

● Lone Star Funds

● M&G Investments

● Oak Hill Advisors

● Oaktree Capital Management

● PGIM

CarVal 9 Oaktree

Oaktree 2 Blackstone

Fortress 6 AXA

Lone Star 4 Ares

M&G 8 Apollo

Avenue Capital 10

2013 2014 20162015 2017 2018

ICG


PDI 50

THE TOP 10

1. Goldman Sachs $43.2bn (2017: 9)

After two years languishing on the edges of the top 10 – taking the ninth and eighth positions in

2017 and 2016, respectively – Goldman Sachs has topped the ranking for the first time. The US investment bank has been a pioneer in the private debt space since its earliest days, taking third place in our inaugural ranking in 2013. It has remained in the top 10 ever since.

The growth of the bank’s private debt business has seen its five-year total nearly double over the past 12 months from $24.1 billion to $43.2 billion. This is largely down to the record $9.9 billion raised for GS Mezzanine Partners VII. The fund held a $3.8 million first close in September 2017 – just three months after launch-ing – having received a commitment from pension fund Korea Post.

The firm also raised $3.16 billion for

Broad Street Senior Credit Partners, a 2015-vintage fund, and a further $4.2 bil-lion for Broad Street Real Estate Credit Partners III, which more than doubled the

amount raised by its predecessor fund.More recently, Goldman Sachs rounded up just over $5 billion for its senior debt vehicle, Broad Street Loan Partners III.

Fruit of labour: Big Apple firm is the cream of the crop

2. Blackstone $42.0bn (2017: 5)

Blackstone has consistently been in the top 10 over the past five years, never dropping below

sixth. This is the second time it has taken the number two spot, having grown its five-year fundraising total from $33 bil-lion to $42 billion.

The New York-headquartered firm manages the bulk of its private debt busi-ness via a dedicated corporate credit arm: GSO Capital Partners. Headed by Ben-nett Goodman, GSO handles a variety of debt strategies, including mezzanine, direct lending, energy credit and dis-tressed. Goodman co-founded the firm alongside Doug Ostrover, who left in 2015, and Tripp Smith, who announced his departure earlier this year.

The firm’s most notable fund closes over the past five years include its flag-ship distressed debt vehicle, GSO Capital

Solutions Fund III, which closed in March this year after raising $7.1 billion. The unit also pulled in $2.5 billion for GSO Energy Select Opportunities Fund in 2015, falling short of its $3 billion target. Now GSO Energy Select Opportunities Fund II is on the road seeking to double the amount raised by its predecessor. Blackstone also hit a final close in 2015 on a $2.2 billion Europe-focused senior debt fund.

The firm’s second-biggest close was the $6.7 billion raised for Blackstone Tactical Opportunities Fund II in early 2016, which fell short of the $7 bil-lion raised by its predecessor. The same year, the firm pulled in $4.5 billion for Blackstone Real Estate Debt Strategies III, surpassing the $3.6 billion raised by Blackstone Real Estate Debt Strategies II just a year earlier.

Goodman: Leading Blackstone’s credit unit


PDI 50

THE TOP 10

4. Ares Management $37.7bn (2017: 10)

This year marks Ares’s highest rank-ing in the PDI 50. The firm made its debut in the top 10 in 2013,

in seventh place. It was 10th in 2016 and 2017 before jumping six spots this year as its five-year total swelled by nearly $14 billion. The firm’s true presence in the market has arguably been under-repre-sented in previous rankings due to Ares’s sizeable BDCs – which are included in a separate ranking.

Ares has had a good year for fundraising, reaching a €6.5 billion final close on Ares Capital Europe IV, which far exceeded its €4.5 billion target in just three months. The senior debt vehicle dwarfs the €2.6 billion raised by its predecessor.

The Los Angeles-based firm also breezed past its $2.5 billion target for its first private junior debt fund, Ares Private Credit Solutions, closing at $3.4 billion

in December 2017 after launching earlier in the year. Though this is the firm’s first private vehicle to invest in junior debt, the firm has provided second lien and mezza-nine debt for years through its BDC, Ares Capital Corporation.

Ares is now in market with its US senior direct lending fund, having locked down $2.2 billion of a $4.7 billion year-end target in November, including lever-age. The firm has raised the target from $3.5 billion.

West coast contenders: Los Angeles-based Ares leaps up the ranking

Dallas-based fund manager Lone Star has dominated the PDI 50 since the start, taking the top

spot in 2014, 2016 and 2017. This is its lowest position since the first ranking in 2013 when it placed fourth.

Lone Star saw a tiny drop in its five-year fundraising total, from $37.8 billion to $37.7 billion, enough to make it fall two places.

Founded by John Grayken in 1995, Lone Star is favoured by a large pool of returning investors for its distressed and real estate funds. With a loyal LP base to support it, Lone Star spends little to no time on the road when fundraising.

Its most recent close on a flagship fund was Lone Star Fund X, which launched in October 2016 with a $5 billion target and closed a month later with $5.5 bil-lion raised. It was also oversubscribed. The

firm is now seeking $5.5 billion for the next vehicle in the family, Fund XI.

Shortly before it reached the final close on Fund X, the firm closed its fifth dis-tressed real estate fund, which exceeded a $5 billion target to raise $5.8 billion after just five months. The previous vehicle in the series also raised $5.8 billion, in 2014.

Last year was a big year for Lone Star Funds in terms of its team and overall strategy. The most notable change was Nick Beevers replacing Sam Loughlin as the firm’s president of North America. The firm also pulled out of its Middle Market Growth Programme joint venture with Antares Capital.

It made some moves in emerging mar-kets, teaming up with India’s Infrastruc-ture Leasing & Financial Services to form a $550 million joint venture to invest in distressed opportunities.

3. Lone Star Funds $37.7bn (2017: 1)

Grayken: Lone Star founder sees his firm to third

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PDI 50

5. HPS Investment Partners $36.2bn (2017: 6)

This is HPS Investment Partners’ third appearance in the top 10 having made its debut in 2016

after completing its spin-out from JPMor-gan. This year the New York-based firm added just under $5 billion to its total.

The additional capital includes the $4.24 billion raised for its HPS Specialty Loan Fund 2016, which surpassed its

$3.5 billion target to hit its final close in late 2017 after roughly 18 months on the road. The firm will use the capital to issue senior debt across diverse sectors in North America and Western Europe.

Prior to that, the firm closed two funds in quick succession, reaching a close on its third mezzanine fund in 2016 after attracting $6.6 billion – one of the largest

fundraises that year. Shortly after, the firm reached a final close on its European asset-based lending vehicle, which raised €800 million.

HPS’s five-year total could grow even more in future rankings. In September, HPS announced it was set to acquire Talamod Asset Management, a Dallas-based distressed debt specialist.

THE TOP 10

6. AXA Investment Managers $35.2bn (2017: 7)

Not only has AXA bumped up one place this year, but the Paris-headquartered firm has

also become the PDI 50’s highest ranking European manager, a title held by M&G last year when it took the number two spot. The bulk of the French insurer’s pri-vate debt business comes via AXA Invest-ment Managers – Real Assets, a unit led by chief executive Isabelle Scemama. AXA has a sizeable real estate debt investment business that comprises insurance account

money and capital raised via funds and separate accounts.

In September 2017 it raised €1.5 bil-lion for its 10th commercial real estate senior debt fund – CRE 10 – after six months on the road. Its previous real estate debt vehicle raised €2.9 billion in 2015. AXA Real Assets is also raising its debut European infra fund which recently hit first close on $900 million. In June, AXA reached a $400 million final close on Allegro VII, a CLO fund.Scemama: leading AXA IM – Real Assets

7. M&G Investments $34.8bn (2017: 2)

M&G saw its five-year fundrais-ing total drop by $1.6 billion this year, causing it to fall back

five spaces. The firm has been in the top 10 every

year since the PDI ranking started in 2013, the only European firm to achieve this. This is M&G’s lowest placing since it took eighth spot in 2013; last year was its high-est, in second. M&G handles investment across direct lending, leveraged finance and infrastructure debt and has £285.8 billion ($367.6 billion; €320.8 billion) in AUM.

As part of its remit, M&G manages a large alternative credit business and a real estate debt fund unit. The firm is investing from its second and third real

estate debt funds, which raised £605 million and £750 million, respectively, in 2014. Investors in the latest fund include New Jersey Division of Investment, New Mexico State Investment Council, North

Carolina State Treasury and the Wyoming State Loan and Investment Board. Ear-lier this year, the firm launched the M&G Infrastructure Loan Fund with a target size of £250 million.

Square mile star: London-headquartered M&G is a regular in the top 10


PDI 50

9. Oaktree Capital Management $29.2bn (2017: 4)

Like Apollo, this year is the first Oaktree has not been included in the top five since the ranking’s

inception. The Los Angeles-based firm has seen its five-year total fall by $4 billion as older funds have fallen off its total. But the firm has been active over the past year – Oaktree raised $2.2 billion for its Real Estate Debt Fund II, surpassing its $1.8 billion target. The fund held its final close in September.

It also collected $720 million for

Oaktree Middle Market Direct Lending Fund, a closed-end vehicle that will invest in senior loans.

Its overall tally also includes Oaktree Opportunities Funds X and Xb, which raised a combined $12.5 billion since their inception in 2015, and the prede-cessor to those vehicles: the $5.1 billion Fund IX.

Oaktree is also in the market with Oak-tree Special Situations Fund II, which has raised $711 million of its $1.8 billion total. Wintrob: Oaktree’s CEO has overseen

a busy year

8. Apollo Global Management $31.1bn (2017: 3)

This is the first year Apollo is not in the top five after its five-year fun-draising total dropped by $4.1 bil-

lion from $35.2 billion. The firm – headed by Leon Black – is deploying capital from its flagship Apollo Investment Fund IX, for which it reached a $24.7 billion final close in mid-2017 after exceeding its $23.5 billion target. The fund pursues three strategies: distressed debt, corporate carve-outs and opportunistic buyouts.

The firm is nearing its $2.5 billion target for its Apollo Structured Credit Recovery

Fund IV, with more than $2.3 billion raised, but it is yet to reach the final close needed for it to be included in the ranking data. The vehicle – which targets CLOs, residential mortgage-backed securities, commercial mortgages, consumer and commercial mortgage-backed securities and collater-alised debt obligations – is a successor to Apollo Structured Credit Recovery Fund III which reached a $1.2 billion close in late 2015. Another sizeable fund that closed in the same year was Apollo Energy Oppor-tunity Fund at $1.1 billion. Black: co-founder and CEO of Apollo

10. Intermediate Capital Group $28.5bn (2017: 12)

London-headquartered ICG is the only firm in the top 10 that did not make the club last year, having

climbed from 12th place. It comes out one place ahead of Cerberus Capital Man-agement, which dropped from eighth. This is ICG’s second appearance in top 10, the last time being 2015 when it ranked seventh, just behind Blackstone.

ICG has seen its five-year total grow by roughly $8.4 billion from $20.1 billion last year, the fourth-biggest increase in the ranking.

The firm most recently held a final

close on ICG Europe Fund VII at its €4.5 billion target size, 10 months on from its January launch. It pursues the same European corporate debt strategy as its predecessor, ICG Europe Fund VI, which closed at €3 billion in September 2016.

Other big fundraises over the past five years include ICG Senior Debt Partners Fund III, which reached a final close of €5.2 billion in September 2017, surpass-ing its €5 billion goal, and its predecessor ICG Senior Debt Partners Fund II, which raised €3 billion in 2015. Durteste: CEO of ICG


PDI 50

2018 GP HQTotal ($bn)

2017 rank

Movement2017 total ($bn)

11Cerberus Capital Management

New York 28.39 8 -3 24.31

12 PGIM Newark 20.80 13 1 18.93

13 TPG Sixth Street Partners Fort Worth 15.80 16 3 13.00

14Fortress Investment Group/ Mount Kellet Capital Partners

New York 14.24 11 -3 21.85

15 Partners Group Baar-Zug 12.90 25 10 10.18

16 Alcentra London 12.49 26 10 9.88

17 Crescent Capital Group Los Angeles 12.40 17 0 12.09

18 KKR New York 12.34 15 -3 13.11

19 Golub Capital Chicago 11.68 20 1 10.98

20 EIG Global Energy Partners Washington DC 11.49 21 1 10.88

21Hayfin Capital Management

London 11.10 18 -3 11.54

22 Castlelake Minneapolis 10.89 30 8 7.74

23 CarVal Investors Minneapolis 9.66 28 5 8.42

24 Bain Capital Boston 9.26 22 -2 10.78

25 The Carlyle Group Washington DC 9.20 27 2 9.67

26 Audax Group Boston 8.96 33 7 6.83

27BlueBay Asset Management

London 8.88 32 5 7.42

28 Oak Hill Advisors New York 8.68 14 -14 16.09

29 AllianceBernstein New York 7.91 43 14 4.19

30 Angelo Gordon New York 7.66 31 1 7.70

11-30

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Member FINRA /SIPC Authorised and regulated by the Financial Conduct Authority Licensed and regulated by the Securities and Futures Commission Licensed by the Monetary Authority of Singapore

In the past 12 months, Campbell Lutyens has raised over $3.5 billion for leading private debt managers across a variety of strategies.

With a global team of more than 140 operating from offices in London, New York, Hong Kong, Singapore, Chicago and Los Angeles, we are celebrating 30 years of delivering results through thoughtful, creative advice and meticulous execution.

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$870m


PDI 50

2018 GP HQ Total ($bn) 2017 rank

Movement2017 total ($bn)

31Kayne Anderson Capital Advisors

Los Angeles 7.11 69 38 2.6

32 Benefit Street Partners New York 6.89 — — —

33Brookfield Asset Management

Toronto 6.75 38 5 4.67

34Macquarie Infrastructure Debt Investment Solutions

Sydney 6.52 29 -5 8.13

35 Varde Partners Minneapolis 6.41 36 1 5.18

36 EQT Stockholm 6.22 53 17 3.43

37 BlackRock New York 6.21 24 -13 10.25

38 Wafra Capital Partners New York 5.96 — — —

39 PAG Hong Kong 5.74 35 -4 5.44

40 Twin Brook Capital Partners Chicago 5.25 — — —

41 AMP Capital Sydney 5.20 54 13 3.42

42 Park Square Capital London 4.93 44 2 4.10

43 Barings Charlotte 4.91 61 18 2.79

44 Strategic Value Partners Greenwich 4.63 52 8 3.60

45Churchill Asset Management

New York 4.57 85 40 2.05

46 Starwood Capital Group Miami Beach 4.40 40 -6 4.47

47 Rialto Capital Management Miami 4.25 41 -6 4.34

48 Centerbridge Partners New York 4.20 70 22 2.50

49 Idinvest Partners Paris 4.19 49 0 3.73

50 Mesa West Capital Los Angeles 4.07 48 -2 3.77

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PDI 50

BDCs

Levelling upWhile the big players continue to dominate, new legislation could shake up future rankings. By Andrew Hedlund

What a year for business devel-opment companies. Perhaps the sleeper issue that awoke

in 2018 was the increase in leverage that BDCs can take on; the Small Business Credit Availability Act became law in the US, allowing BDCs to increase their borrowing capacity from a 1:1 debt-to-equity ratio to 2:1.

Of course, the change creates a host of issues for the industry. How should BDCs

get approval to use it? How do they enact it? How does it affect their borrowing costs? It gives BDCs the opportunity to massively grow their balance sheets – Apollo Investment Corporation’s plans could hike its total assets by up to $1 billion. Expect some movement in the coming years in these rankings as BDCs begin to tap their additional borrowing capacity.

On a name-specific basis, FS

Investment Corporation and Corporate Capital Trust have a merger pending, which would make them the second-larg-est publicly traded BDC. The firms had plans to merge their four private BDCs with the combined CCT-FSIC public entity, but those plans were put on hold following lacklustre performance from FSIC. If the FS-CCT public combination closes, that will cause further movement in the top 10.

BDC Total assets as at 30 June ($bn)

1 Ares Capital Corporation 12.30

2 Prospect Capital Corporation 5.83

3 Corporate Capital Trust 4.38

4 FS Investment Corporation 3.88

5 Apollo Investment Corporation 2.57

6 Main Street Capital Corporation 2.46

7 Oaktree Specialty Lending Corporation/Oaktree Strategic Income Corporation 2.24

8 New Mountain Finance Corporation 2.21

9 Solar Capital/Solar Senior Capital 2.20

10 PennantPark Floating Rate Capital/PennantPark Investment Corporation 2.08

UNBEATENNot only has Ares remained the biggest public BDC manager, it has done so by a wider margin than last year

BDC Total assets as at 30 June ($bn)

1 FS Investment Corporation II/FSIC III/FSICIV 8.86

2 Owl Rock Capital Corporation/ORCC II 4.06

3 FS Energy & Power Fund 3.82

4 Business Development Corporation of America 2.66

5 CION Investment Corporation 2.01

FAMILIAR FACESThe list of the top five non-traded BDC managers remains largely unchanged but for Owl Rock’s rise to second place


PDI 50

Understanding the rankingThe PDI 50 is based on global private debt fundraising over the last five years, and follows similar rankings in other PEI Media titles

The PDI 50 ranking is based on the amount of capital raised by private debt investment programmes over a five-year period. This year, the five-year window spans from 1 Janu-

ary, 2013, to 1 June, 2018. Where two firms have raised the same amount of capital over this period, the higher rank goes to the firm with the largest active pool of capital raised since 2012, ie, the biggest single fund. If there is still a tie after taking this into account, we give greater weight to the firm that has raised the most capital within the past one or two years.

We give priority to information that we receive from the fund managers themselves. When managers confirm details, we seek to “trust but verify”. Some details simply cannot be veri-fied by us, and in these cases, we defer to the honour system. To encourage co-operation, we do not disclose which firms have aided us on background and which have not. Lacking confirmation of details from the firms themselves, we seek to corroborate information using firms’ websites, press releases, news reports and limited partner disclosures.

Our definition of private debt is capital committed by inves-tors to funds investing in company debt, or the debt financing of leveraged buyouts, infrastructure projects and real estate. This includes all elements of the capital structure except equity, including senior, unitranche and mezzanine investments. Asset-backed lending, distressed debt or credit-oriented special situ-ations funds are also included. In the case of a fundraising, we look at funds with a final or official interim close after 1 January, 2012. A recent interim close – a real one, not a ‘soft-circle’ – can count even if no official announcement has been made. We also count capital raised through co-investment vehicles. BDCs are not accounted for in the PDI 50 ranking, but are ranked sepa-rately by total asset value.

The following does not count as private debt: high-yield bond funds, sovereign and government debt funds, traditional fixed income vehicles, collateralised loan obligation funds, funds of funds and secondaries, hedge funds, opportunistic investors and special situation funds.

WHAT COUNTS AS CAPITAL RAISED

WHAT DOES NOT COUNT AS CAPITAL RAISED

Limited partnerships: in most cases, funds are raised through LP commitments but in some cases capital is raised through contributions from an affiliated entity.

Co-investment capital: we count co-investment vehicles as well as opportunistic co-investment capital raised by managers.

Public entities: this is capital raised by managers that happen to be publicly traded.

Seed capital or GP commitment: we count any seed capital committed to any fund raised by the firm.

Expected capital commitments: we do not count ‘soft-’ or ’hard-circled’ commitments – only official final and interim closes.

Opportunistic capital: an entity that can opportunistically do debt deals, but has no dedicated programme, cannot not be counted.

Capital recycled from predecessor funds: we do not include the value of recycled capital within the five-year period.

Contributions from sponsoring entities: where capital is earmarked to a firm for a dedicated private debt programme, we do not count the amount drawn down for deals over the five-year period.

Public offerings: we do not count capital invested via public offerings. This takes recycled capital into account.

Deal-by-deal raises: private debt co-investment capital raised on a deal-by-deal basis is not counted.

METHODOLOGY

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