What Leading Asset Managers are talking about in Q224
What Leading Asset Managers are talking about in Q224
Fundraising from Ares, Anchorage Capital, SMBC, Gaw Capital and Trifecta Capital
👋 Hey, Nick here. A special welcome to the new subscribers at Carlyle & Franklin Templeton. This is the 73rd edition of my weekly newsletter. Each week I write about private credit insights and fundraising announcements. You can read my previous articles here and subscribe here.
This week’s newsletter is a summary of what leading asset managers are talking about. If you haven’t had a chance to listen to the Q2 earnings 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.
Data Centres, Energy Transition, Infrastructure
Deployment
Pricing
Pluralsight- ❤️ I’d highly recommend reading this section
Portfolio
Tailwinds
Partnerships
Non-accruals
Scroll down to the bottom if you’re here for the fundraising news
📚 Quotes of the Quarter
Data Centres, Energy Transition, Infrastructure
Apollo: “What we're seeing in our business is not the result of a quarterly spike or peak. We're seeing a fundamental shift in the marketplace, and it is happening across the entirety of our franchise. If you step back and think about what the big drivers are, we are looking at three really interesting trends.. We are going to spend an awful lot of money on next generation of infrastructure for data centers and AI. We are going to spend an equal amount of money for energy transition, and we are going to spend a lot of money on what I'll call normal infrastructure. All three of those things are long dated. Many of them are structured. Many of them are complex. These are the kinds of things that are not well suited for institutions who are funded short. These are exactly the kinds of transactions in the investment grade market that we expect to drive our business and are driving our business.”
Blackstone: ”I'd like to take a moment to discuss what Blackstone is doing today in artificial intelligence, specifically in data centers, which is an essential part of that breakthrough area. AI is widely acknowledged as having the potential to be one of the greatest drivers of transformation in a generation. I have personally been active in this field since 2015. I believe the consequences of AI are as profound as what occurred in 1880 when Thomas Edison patented the electric light bulb. While it took years to develop commercially viable products, the subsequent build-out of the electric grid over the following decades has parallels to the creation of data centers today to power the AI revolution. Current expectations are that there will be approximately $1 trillion of capital expenditures in the United States over the next five years to build and facilitate new data centers with another $1 trillion of capital expenditures outside the United States.”
Blackstone: “The need to provide power for these data centers is a major contributor to an expected 40% increase in electricity demand in the United States over the next decade compared to minimal growth in the last decade. We believe these explosive trends will lead to unprecedented investment opportunities for our firm. Blackstone is positioning itself to be the largest financial investor in AI infrastructure in the world as a result of our platform, capital and expertise. Our portfolio today consists of $55 billion of data centers, including facilities under construction, along with over $70 billion in prospective pipeline development. Our largest data center portfolio company, QTS, has grown lease capacity seven times since we took it private in 2021.”
KKR: “If you look at recent deal announcements, you'll see that data centers and energy transition will be big themes.”
Blackstone: “We're one of the world's largest managers; in the energy transition field, where we own the largest private renewables developer in the United States; and of course, in data centers, where we own the fastest-growing platform in the world.”
Apollo: “I expect this to drive our business over the next decade against the backdrop of regulatory change, against the backdrop of government borrowing, and all the other trends that we know are happening in fixed income.”
KKR: “Our credit vehicles alone this year have evaluated over $10 billion of data center financing opportunities.”
Deployment
Oaktree Specialty Lending: “Credit investors are seeking opportunities to put capital to work in anticipation of declining future interest rates. While new issuance favors private credit, the market is experiencing more competition as syndicated loan activity picked up during the first half of 2024. The private credit markets also remain optimistic that M&A activity will increase in the second half of this year. In general, private market borrowers remain healthy, demonstrating EBITDA growth and favorable coverage ratios.”
Apollo: “Recall that we have a $125 billion target for this year for originations. We originated $52 billion in the quarter, including $11 billion from Intel alone. We are quickly approaching the $150 billion target that we set for 2026, and the team is unhappy to hear this because they know I'm going to revise the number up.”
KKR: “In credit, we're seeing the benefits of a scaled $230 billion-plus platform with significant opportunity across now a $40 trillion global credit space. Our private credit business is now over $100 billion and we continue to see attractive investing opportunities”
Ares: “We observed a particularly clear acceleration in private equity sponsor activity as most sponsors are seeking capital to support the growth of their portfolio companies and to exit investments as they work to increase distributions from aging fund vintages.”
Ares: “We reviewed 40% more new transactions compared to the prior quarter, resulting in an estimated $185 billion in total quarterly deal volume reviewed.”
Ares: “60% of our total commitments in the quarter were to existing portfolio companies.”
Blackstone: “We deployed $34 billion, the highest level in two years, and nearly $90 billion in the last three quarters since the 10-year treasury yield peaked. With inflation continuing to recede, we expect the Fed to begin cutting interest rates later this year. This should be very positive for Blackstone's asset values and provide the foundation for a significant realization cycle over time.”
Pricing
Ares: “Our second-quarter originations had a weighted average loan-to-value of below 40%, all in yields of approximately 11%, and leverage levels nearly a half turn below our weighted average over the past three years”
Oaktree Specialty Lending: “The spreads are tighter this year than they were last year, and I would say fairly meaningfully so. We are cautious about new LBOs as well as existing ones, given the elevated base rate environment. So we are being cautious. We are very mindful of valuation multiples, leverage multiples, loan-to-values. You can see it in our origination, most of what we did was first lien.
Pluralsight
Blue Owl: “Pluralsight is an IT training business that was bought by Vista and that we led the financing of with several other private lenders. It is not a software business, just to make sure we're all clear on where it lands. But look, Vista is a great sponsor, make a lot of great investments, and we do a lot of business together. This one didn't work. I mean, obviously, that's disappointing to them. It's disappointing to us. We care a lot about Pluralsight's performance and every credit and ultimately, every recovery. At the end of the day, a small loan.
It's a little over $300 million out of our almost $100 billion portfolio. And now we'll end up owning it without lot of debt, again, it's not what Vista or we wanted to be the outcome.
But actually, it's kind of a study in private lending working, which is here will be a smooth handoff I expect, and we'll carry on and supporting the management and the business and stay tuned for the next few years, and we'll find out what the exact recovery is.
Do we get all our money back? We'll all find that out together in the next few years. But that's the limit of the drama. It just doesn't really matter to our business. And no, I don't think you can extrapolate anything from it.
Oaktree Specialty Lending. “The difficult macro environment and increased competition have created challenges for the top line while the rapid rise in interest rates has pressured the company's liquidity position. In response to these issues, the company appointed a new CEO in April of this year with the mandate of improving operational and financial performance. Lenders are engaged in an active dialogue with the sponsor and the company regarding the most logical path forward. We took a meaningful markdown on our position to better reflect the current situation.”
Ares: “I'm surprised people actually were going to ask a question about Pluralsight. I'm kidding… Most of what's been reported in the press is not accurate. Unfortunately for Vista Equity Partners, it's not going to be a situation that works out very well for them. So they're handing the company over to a significant group of lenders. We're not the agent on the facility. Owl Rock is. And so we're working with the group to put a restructuring in place there, where lenders will obviously reduce debt and take control of the company. That's the first time that's happened in our history.
Portfolio
Oaktree Specialty Lending: “In general, the higher interest rates of the last two years have materially increased the interest burden for levered companies. This has heightened the potential for more borrowers to find it challenging to service this more expensive debt. We're closely monitoring all of our portfolio companies and the overall health of our portfolio with respect to how this interest rate environment is impacting their performance. We are engaged and working with companies to the extent that we need to address their specific situations.”
Ares: “We don't have a lot of concentration in our portfolio either with sponsors or sponsored versus non-sponsored. When we really drill through and look at who are the biggest sponsors in the portfolio, they're obviously sponsors that we do a tremendous amount of business with that we have a lot of confidence in. Vista is one of them. Pluralsight didn't work out so well for them, unfortunately.”
Ares: “The organic weighted average LTM EBITDA growth of our portfolio companies reached 12% in the quarter, which is roughly double the rate from a year ago.”
Ares: “Improving portfolio company interest coverage ratios and declining overall portfolio leverage levels now reaching the lowest level you're seeing in four years.”
Blue Owl: “On average, underlying revenue growth was in the high single digits and EBITDA growth was in the mid-teens across the portfolio with no significant step-ups in nonaccruals or/and requests.”
Blackstone: “Our emphasis on senior secured positions with average loan-to-values of 44% provides significant equity cushion subordinated to our loans. We're the sole or lead lender in approximately 80% of our U.S. portfolio,”
Oaktree Specialty Lending: “Higher interest rates for an elongated period could present challenges for companies that carry high levels of debt. Although the pace of inflation has slowed, it remains an issue for companies and consumers alike. We are also diligently monitoring companies that will require refinancing in the near future. If market conditions become more constrained, these companies may find it challenging to obtain essential capital.”
Tailwinds
Blue Owl: “The continued demand for direct lending is extremely strong even when the syndicated market is widely available… That's actually a really meaningful data point because people have always overread this idea that all it's when the market's close, then direct lending is a solution… What we're seeing is the extreme durability of having long-term capital to provide long-term solutions and deliver the 3Ps: predictability, privacy and partnership.”
Partnerships
Apollo: “You will see lots of partnerships this year. All of the big firms have a seat at the table and a right to participate in this because they originate somewhat uniquely. If you think about what's happening in asset management, more generally, active management has had a relatively tough decade. It has not outperformed the broader index for a very substantial portion of its time. Each of those active managers is undergoing their own strategy review. In some cases, they are buying alternative managers. And in other cases, they are partnering. This to me is one of the most exciting pieces of our business because we, as an industry, not just Apollo, we will reach family offices directly. It makes sense to cover them.”
Apollo: “We recently secured a sizable strategic investment from Mizuho Bank in Apollo Clean Transition Capital, our flagship climate and transition credit strategy. Importantly, Mizuho's limited partner commitment is the largest they've ever made, which speaks to their support and advocacy of energy transition as well as the broader Apollo relationship.”
KKR: “the long-term secular opportunity, mass affluent individual investors have not had an easy way to access alternatives. We expect an opportunity for trillions of dollars of assets to flow into these products. And given our brand, our track record, and the investments we've made in distribution and marketing, it just feels like we're really well positioned to continue to be a winner.”
Non-accruals
Blackstone: “The default rate across our 2,000-plus noninvestment-grade credits was less than 40 basis points over the last 12 months, as Jon noted, with no new defaults in private credit in the second quarter. “
Oaktree Specialty Lending: “Investments on non-accrual status at quarter end represented 3.7% and 5.7% of the debt portfolio at fair value and cost, respectively. That was up from 2.7% of the debt portfolio at fair value and 4.3% of the portfolio at cost last quarter.”
Oaktree Specialty Lending: “We experienced an increase in non-accruals during the quarter, driven by the additions of Pluralsight, Auven, and the mezzanine tranche in Dialyze. Additionally, we recorded $42 million in net markdowns during the quarter, primarily driven by Pluralsight and our equity investment in SiO2.”
Sources: KKR, Apollo, Ares, Blue Owl, Blackstone, Oaktree
💰Fundraising news
Ares announced a final close of $15.3 billion for its Senior Direct Lending Fund III. The total capital base including leverage is expected to be ~$33.6 billion. The fund provides senior secured loans to middle-market companies in North America. It has already deployed $9.0 billion to over 165 companies. The Fund is nearly double the size of SDL II, its 2021 predecessor fund. More here
Anchorage Capital Group, a New York-based investment advisor, reportedly had a first close of $600 million for its Anchorage Credit Opportunities VIII fund. The fund will invest in distressed debt and special opportunities in the US and Europe. Anchorage Capital Group was one of the biggest hedge-fund investors in distressed debt before closing its flagship fund in 2021. More here and here
Sumitomo Mitsui Banking Corporation, a Japanese bank, launched its ~$500 million European private credit fund. The fund will lend senior-secured loans to middle-market businesses in Europe. More here
Gaw Capital Partners, a Hong Kong-based private equity fund, and Ray White Capital, an Australia-based investment manager, announced a $325 million strategic partnership. The fund will invest in private credit opportunities across Australia and New Zealand. More here and here
Trifecta Capital, an India-based Venture debt fund, launched its fourth fund targeting $240 million. The fund lends to fast-growing Indian technology startups. These companies are typically revenue-generating and have raised their Series A or B investment rounds. More here
Westbrooke Alternative, a South Africa-based Asset manager, raised ~$20 million for its flagship private credit fund, Westbrooke Yield Plus. The funds provides loans to lower and middle-market UK companies and real estate sponsors. It is an open-ended Jersey Expert Fund and is currently has a diversified portfolio of 53 predominantly floating rate private debt transactions mainly in the UK. More here