The Credit Crunch #51
What Leading Asset Managers are talking about. Fundraising from Goldman Sachs Asset Management, Mubadala, Tikehau Capital, Pollen Street Capital and Palatine
Welcome to the 51st Credit Crunch.
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This week’s Credit Crunch is a summary of what leading asset managers are talking about. If you haven’t had a chance to read the Q4 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.
The Rise of Private Credit
Portfolio Credit Quality
Competitive Advantages
Investor and Borrower Demand
Banks vs Private Credit
Asset-Based Lending
Private Credit Outlook
If you’re here for the fundraising news then scroll down to the bottom.
If you work at KKR, let me know how I get an invite to your Investor Day. I’m also hoping to receive a "nice little trinket."
📚 Quotes of the Quarter
The Rise of Private Credit
Apollo : “Credit, we believe, will dominate 2024 growth at Athene”
Blackrock: “We continue to see these categories [infrastructure and private credit'] to be our primary growth drivers in the coming year”
KKR": “So as a reminder as of year-end, we had around $90 billion of private credit AUM, almost 50 of that was in asset-based finance and $38 billion in direct lending. So these are big businesses for us. I think probably larger than someone might expect in the framework of KKR.”
Carlyle: “We have driven a nearly 300% increase in credit AUM over the past four years.”
Ares: “Fourth quarter deployment across the credit group increased nearly 60% over the third quarter driven by strong results from our U.S. and European direct lending and alternative credit groups.”
Portfolio Credit Quality
Blackstone: “The good news is the credit quality of what's being originated still feels very good. I mean the average loan to value last year for us in our direct lending was only 40%, a fraction of what it was let's say, 15 years ago. And you look across our portfolio in direct lending, and defaults are almost nonexistent, which is quite remarkable. So the platform seems to be in good shape. There may be more capital coming to the space, but I think there'll be more deal flow as well. So that's a positive”
Ares: “We continue to see strong EBITDA growth across our credit and private equity portfolios. And in fact, we saw an acceleration of EBITDA growth to approximately 8% year-over-year within our U.S. direct lending segment. Our corporate credit portfolios, which were more than 95% invested in senior debt at the end of the year, continue to have low defaults and lower-than-historical levels of loan-to-value.”
Ares: European Credit Quality versus the U.S “ It is remarkably similar. If you look at the EBITDA numbers that were quoted for the ARCC portfolio is about an 8% year-over-year EBITDA growth that had accelerated from 6% in the prior quarter. If you look at the European direct funding, which is actually pretty amazing, year-over-year EBITDA growth was 18%. LTVs are a little bit higher. They’re kind of in the 48% range in Europe versus 42%, 43% in Europe. Interest coverage is a little bit higher in Europe, 1.8 versus 1.6. But if you just take all of the different ways to articulate credit exposure, they're largely similar. But we're seeing a surprising amount of momentum and resilience within the fundamental revenue and EBITDA portfolio in Europe right now.”
Competitive Advantages
Blackstone: “There are other players coming into the direct lending space. The good news, going back to the earlier conversation, is we're seeing a pickup in transaction activity. And so although the supply of capital may be picking up here, I think the demand for that capital will grow. I'd also say for us specifically with $100+ billion in the space, our ability to write very large checks is a very significant competitive advantage. So the fact that we can commit to a multibillion dollar transaction on our own across our various private vehicles, our BDCs, that is really helpful.”
Apollo: “We have 16 origination platforms. Only a couple of them are at scale. This is about growing the origination platforms. We are focused – and I don't think we need a 17th, although that may result, but that is not the goal. We are not short of opportunity. It's now about focus and execution and simply delivering. I mean, even a $20 billion origination platform or $22 billion which is MidCap, still has lots of room to grow. MidCaP is just building out their European business, adding products. They have the capacity to double that business. Atlas has the capacity to double their business. Alliant more than doubled their business. We have to actually scale what we have and execute. And we're doing it in a very supportive environment.”
Franklin Templeton:“We believe the current market opportunity and backdrop for US direct lending is attractive and BSP has significant underwriting experience, loan structuring expertise and focus on deep due diligence, which provides us with a significant competitive advantage.”
Ares: “If you look at the actual numbers, the preponderance of dollars that get raised and deployed are in the hands of a few large long-tenured incumbent lenders. That has been the case. That consolidation trend is accelerating. And there are meaningful benefits to scale in private credit, the ability to originate and invest in broader origination teams around the globe, the ability to have flexible capital at scale to drive better deployment in different market environments and so on and so forth.”
Ares: “if you look at our direct lending business last year, in the fourth quarter alone, we did $14 billion of deployment, which is larger than most private credit managers total AUM. So we’re – I don’t want to sound immodest, but we continue to execute well given all the competitive advantages we have.
Investor and Borrower Demand
Apollo: “In a higher interest rate backdrop … institutional investor focus has pivoted to asset classes that offer current income, inflation protection and access to areas of secular growth, namely credit, infrastructure and sustainability. We believe we're well positioned to capture this demand with our direct lending, asset backed finance, opportunistic credit”
Blackstone: “Borrower demand is multiples of supply today, and deployment in our credit, insurance and real estate credit businesses more than tripled in Q4 compared to the third quarter, to $21 billion.”
Banks vs Private Credit
Apollo: “Recall that we are the beneficiary of regulatory choice around the globe where regulators have decided that they prefer more of the debt capital in markets to come from the investor marketplace than from the banking system. That does not mean the banking system doesn't play a vital role or that it will shrink. It simply means that credit growth, which typically follows GDP. I believe much of that growth is going to occur in the investment marketplace. Some of that will incur in pure beta products, investment-grade bonds and high-yield bonds that we are just not all that interested in. But we're talking about a massively large market where we are, even at our size, a small participant. So I do the following math, Alex, and it's helpful. We have a $500 billion private credit business today. Somewhere between $150 billion and $200 billion of that is beta. For us to double our credit business, we have to double $300 billion. I like our chances of doing that over the next five years, because the beta comes for free.”
Blackstone: “The banks are coming back, although their appetite for bridging things for long periods of time I still think is a little more limited… And structurally, I think the direct lending's competitive advantage is our ability to give borrowers certainty. From the bank's standpoint, of course, they've got to have some flex because they want to distribute that paper. They don't want to take losses. We, because we're in the storage business, can offer that borrower certainty. And so particularly on new originations, we think that is an area that will continue to be strong for direct lending. So yes, I think the environment does get a little more competitive.”
KKR: “M&A volumes have been down. Private credits had a larger share of a smaller amount of volume. And so as the banks come back, our expectation is you'll see M&A volume pick up, and there'll still be plenty for the private credit market to participate in.”
Ares: “Obviously, now with Basel III and some of the challenges that I think we all saw emerge in the banking sector generally early last year, there is an accelerated cyclical opportunity, obviously, to partner with banks largely in our Alt Credit business to help them navigate some of their balance sheet challenges. And that’s been a keen area of focus, but not an exclusive area of focus. We talked on our last call about a sizable partnership transaction that we did with PacWest. We were public about a recent trade that we did on the risk transfer side. And those dialogues are ongoing and continuing. And I actually think that they will continue regardless of the resolution of Basel III end game. I think what we learned coming out of the struggles in the sector were largely structural. And once we get past this first phase of balance sheet restructuring and repositioning, I think you’re going to have a lot of banks, regional, super regional and GSIBs just rethinking core businesses and balance sheet positioning. And we put ourselves out there as a proven partner for them as they go through that. So, I think it’s – it bodes well for continued deployment. And we had a very strong fourth quarter in Alt Credit. We’re seeing that activity level spill over into the New Year, and I’d expect that to continue. “
Asset-Based Lending
KKR “So I think as banks pull back from many types of lending and divest noncore loan portfolios, our opportunity set, we think, is just going to continue to expand. And you've actually seen this in recent announcements from us. So two weeks ago, we announced an accounts receivable financing for our barbecue business [Weber]. I remember you actually sent me an e-mail on this. As I know you were hoping that could lead to nice little trinkets at our next Investor Day. In December, we announced a partnership with BMO focused on a $7 billion portfolio of RV loans. In October, Goldman announced the sale of the GreenSky platform to a handful of buyers of which we were part of that consortium. And in August and September, we announced the acquisition of a portfolio of prime auto loans from a regional bank in the Southeast. So I think you're seeing lots of opportunities to firms like ours to participate in asset-based finance in a way that you didn't see 5 years ago, and it's a really important tailwind as we think about the growth and opportunities that we see ahead.
KKR: “But this ABF business, I don't think is that well understood yet, whereas the direct lending market is probably roughly $1.5 trillion, the ABS market is probably closer to $5 trillion, on its way to $7 trillion. And it is kind of my view, becoming an asset class for institutional investors to understand a little bit. Like 10, 12 years ago, infrastructure and direct lending were very new concepts for most investors. We're having more dialogue on asset-based finance, seeing more investors start to create an allocation or a sub-allocation on private credit.”
KKR: “We have 20 or so origination platforms around asset-based finance so far, and I'd expect that number to continue to go up. I would guess in April when we're together for the Investor Day, we'll go deeper on that topic.”
Private Credit Outlook
Ares: “I’ve been pretty vocal on this, and I think that you kind of have to distill the signal through the noise in terms of the amount of capital and new entrants into private credit. So first, it’s important, if you look at the growth in private credit markets over the last 10 years, it’s basically grown at the same compound annual growth rate as every other market that folks participate in. It grows linearly, so it grows in a different way. But if you just look at the actual growth, it hasn’t actually outpaced, it’s not frothier.
If you look at the structure of the private credit markets and you say that the biggest users of private credit across the private credit spectrum are institutional equity owners, there’s still a significant shortfall of supply of private credit relative to the demand. So just if you use the private equity market as an example, there’s about $1 trillion as I mentioned of dry powder in the private equity market today against maybe $200 billion of private credit dry powder. So you’ve got 20% private credit raised against the private equity installed base. And if you said that roughly 50-50 debt to equity, you need to see a $1 trillion of private credit capital formation just to satisfy the private equity capital that’s been raised.
So if you look at the number of people raising their hand that are saying we’re in the private credit business, yes, that has increased. But if you look at where the dollars are flowing and the dollars already getting deployed, the competitive dynamic is not that different.
Apollo (Link), Ares (Link), Blackrock (Link), Blackstone (Link), Franklin Templeton (link), KKR (Link)
💰Fundraising news
Goldman Sachs Asset Management and Mubadala announced a $1 billion Asia Pacific Co-invest Partnership. The Partnership will be managed by Goldman Sachs Alternatives, with a dedicated on-the-ground team across multiple Asia Pacific markets. It will aim to deploy U$1bn of long-term capital to high quality companies and sponsors throughout the Asia Pacific region. The Partnership will invest across the private credit spectrum and will have a particular focus on India. More here
This announcement reiterates Mubadala’s enthusiasm for co-investing with US private credit managers. Other notable investments include Churchill’s CLO (Link), Blue Owl’s Technology fund (Link), Ares European Real Estate (Link), and Ares Secondaries (Link).
Ardian, a France-based private asset manager, is raising ~$5.4 billion for its Sixth Private Credit Fund. The fund lends to European mid-sized companies in non-cyclical industries like software. Ardian predominantly lends senior loans and has completed a smaller number of junior debt transactions. Deals are fully covenanted and the investment team frequently takes an observer seat. It operates from offices in Paris, London, and Frankfurt. More here and here
Tikehau Capital and UOB-Kay Hian jointly launched an Asia Pacific Credit strategy. Paris-headquartered Tikehau Capital, manages ~€17 billion dedicated to Private Debt strategies and brings the partnership its credit underwriting experience. Singapore-based, UOB-Kay Hian is the largest stockbroker in Southeast Asia with an established Asian sourcing and origination network. The strategy will provide financing to mid-sized corporates across Asia Pacific. The focus will be on growth, working capital, and refinancing lending to borrowers in resilient and defensive industries. Both sponsors will be contributing US$50 million each. More here
Pollen Street Capital, a London-based Private Equity firm, announced it closed a ~$290 million side vehicle. It also expects to hold the first close of its Private Credit Fund IV in the first half of 2024. Pollen Street provides asset-backed loans to companies in the financial and business services sectors. Pollen Street has invested £3.6bn across 100 investments since 2015. More here and More here
Palatine, a UK-based Private Equity firm, announced a first close of ~$95 million for its Growth Credit Fund. The venture debt fund will lend to fast-growing British B2B companies. It will focus on sectors such as AI, SaaS, Cyber, and fintech. More here