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Private credit managers try to get creative in lacklustre fundraising environment
by Lisa Fu
Facing a less-than-ideal fundraising environment, private credit managers are having to pull various levers to secure equity commitments for their latest funds.
The challenges for private credit managers stem mainly from problems in private equity. The recent weakness in the M&A market and the IPO cycle, has led to fewer PE realisations, and less money for LPs to reallocate to private credit, according to Paul Buckley, CEO and managing partner at placement agency First Avenue. LPs are seeing more capital called from managers than they are getting back, he said.
With constrained capital across all alternatives, private credit managers are having to become creative. Their latest tricks include advertising fee breaks, working with secondaries funds and creating new structures to corral commitments.
It helps to show everybody is getting [a fee break]
Lindsay Trapp
Partner
Dechert
While private credit managers have always offered fee breaks to certain LPs, structuring a scaled management fee for the fund has become standard. The managers will advertise upfront how certain cheque sizes will correspond to specific fee rates, hoping the discounted fees might entice investors to commit larger amounts of capital. This type of transparency was previously seen more in hedge funds, but it has become standard for private credit funds over the past 18 months, according to Lindsay Trapp, a partner at law firm Dechert.
“It helps to show everybody is getting [a fee break],” Trapp said. “People still negotiate around it, but it gives everybody at least a step in that direction.”
Rather than negotiate fees on an ad hoc basis, it is best practice to bake them into the terms of the fund from the beginning, agreed Jeffrey Griffiths, global head of private credit at placement agent Campbell Lutyens. Different fee rates for different-sized investors from the beginning is something the firm has been doing for many years.
Allowing investors to see a few investments ahead of time is another tool. “If you can seed the fund with assets, that is attractive to a lot of investors,” Griffiths said. “If they can diligence the assets, they get access to the cashflow more quickly. It helps the cash efficiency and the net IRR of the investment.”
The firm has seen some GPs seed the next vintage fund with assets to appeal to investors, but using a warehouse line to do this can be challenging. It is not easy to find the equity necessary for the warehouse financing, he said.
Managers have found unlikely investors in the secondaries market. For the first time, private credit GPs are sourcing primary commitments from the secondaries market, said Buckley. Secondaries investors provide these fund commitments in return for direct access to loan portfolios.
A private credit GP can sell an existing fund share to a secondaries firm at a discount, in exchange for an equity commitment for the upcoming vintage, one investment banker explained.
Some private credit secondaries funds and tactical opportunities funds are also buying the equity or junior portion of rated notes, and becoming a new type of LP for the private credit fund, Trapp said. In those instances, insurers usually take the senior portion of rated notes that feed into the private credit fund.
Introducing new structures is another way to get LPs in the door. Some private credit managers are creating parallel funds that comply with European ESG requirements to attract capital from ESG or sustainability-conscious European institutions, according to Trapp.
“Previously, it would not have been a consideration to do a whole fund and then also do a parallel fund that does the ESG parts,” said Trapp. “I’ve now seen that a few times, which is interesting.”
Looking to 2025, the fundraising market for private credit appears rosier, with institutional investors still interested in committing capital to private credit. “I expect next year is going to be much easier,” Griffiths said.
