Private-Credit Fundraising on Track to Decline for Third Straight Year

Date: September 13, 2024

Author: Isaac Taylor

Source: Wall Street Journal Pro

Global private-credit fundraising is declining for a third straight year, despite the rising popularity of the asset class among institutional investors. Overall capital collected fell to $215.4 billion last year from $245.8 billion the previous year, marking a 12.4% decrease, according to research provider PitchBook Data. This year through Aug. 22, credit fund sponsors had raised $118.8 billion, suggesting a further slowing.

“Investor allocations have been challenged because of the significant exposure that investors have had to private equity and venture capital,” said Jeffrey Griffiths, the global head of private credit at Campbell Lutyens, a firm that provides capital-raising services for private-fund managers.

Funds managed by PE and VC firms in general haven’t returned as much cash as investors expected in the last couple of years because of high interest rates and very slow dealmaking activity, Griffiths said. So many investors haven’t had sufficient liquidity coming through from their private-markets investments to reallocate from equity into credit funds, although they might have wanted to make such a switch, Griffiths added.

Institutional investors such as pension funds and insurers have indicated a preference for steering more capital to private credit in recent surveys. Nearly 61% of fund limited partners said they plan to expand their asset allocation to private credit this year, according to an annual survey released in April by data provider S&P Global Market Intelligence. In June, market researcher Preqin said investor sentiment toward private debt remained “very high,” with half of respondents to a survey indicating they planned to commit more money to the strategy and 42% saying they planned to maintain current levels.

But new capital commitments in recent times have favored larger, more established firms that have a record with limited partners. “I think the trend globally is that investors are becoming more selective,” said Vivek Mathew, the head of asset management for Antares Capital, commenting on the fundraising slowdown.

Also, banks have become more active in making loans to midsize businesses recently, but they typically concentrate on larger companies in the market. Much of the activity in private credit happens at the mid to lower end, he added.

Investors remain underweight in the private-credit asset class relative to their targets, according to a 2024 private-markets annual report from consulting firm McKinsey. “The allocation gap has only grown wider in recent years, a sharp contrast to other private asset classes, for which LPs’ current allocations exceed their targets on average,” the report stated.

However, market turmoil in recent years led many investors to make new commitments only with proven managers, which tends to make building a new fund easier for larger and more established firms and more difficult for younger sponsors, according to several investment professionals.

The Alaska Permanent Fund, a state-controlled investment vehicle with assets of $78 billion, works with roughly 15 to 20 private-credit managers and doesn’t expect to increase that number, said Marcus Frampton, the fund’s chief investment officer.

Despite the fundraising slowdown, private-credit managers built their mountain of undeployed capital, known as “dry powder,” to $506 billion by the end of last year, up 4.1% from $486 billion the previous year, according to PitchBook. But the total is still below the record peak of $525 billion reached in 2020.

Fundraising headwinds haven’t led many firms to close new funds with less capital than their predecessors took in, Griffiths said. Firms face pressure to make sure their next fund closes higher than the last, prolonging marketing periods for some managers compared with their previous fundraising efforts. Sponsors will keep a fund open for as much as two years to make sure they can raise more than they collected for a predecessor vehicle, investors familiar with the matter said.

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