Direct Lenders Stay in Vogue as Fundraising Tops $23 Billion

(Bloomberg) -- Direct lending had another strong year for fundraising as investors piled into higher-yielding assets, though the new capital is likely to fall short of a record for the second year in a row.

More than $23 billion has been raised in North America for the strategy through Dec. 12, according to London-based research firm Preqin. Tom Carr, the firm’s head of private debt, said there’s still a possibility that number could match or even exceed last year’s $24.9 billion, though it won’t beat the record $36.3 billion raised in 2017.

Fierce competition among lenders has reduced yields and eroded investor protections in deals. Yet supporters of private debt are still willing to put money to work amid expectations it will withstand a downturn better than some other asset classes such as junk bonds because the loans are typically first in line for repayment if a company runs into trouble.

“The appetite for direct lending continues to be strong,” said Brett Hickey, chief executive officer and founder of lower middle-market lender Star Mountain Capital. “Particularly as investors worry more about the future economy, they like putting money into the safer part of the capital structure.”

Yet there are signs of caution emerging. The number of funds that successfully raised money dipped to 23 this year from 37 in 2018, which may indicate that smaller lenders are struggling to attract cash, Carr said. Some skeptics of the asset class say the loans have yet to be tested in a recession and that it doesn’t take much for a portfolio to suffer losses if some companies struggle.

“That could be due to the uncertainty investors are feeling,” said Carr. He said they’re looking for managers with a track record, and that those are the ones doing quite well.

Even though investors may not be pouring as much new money into direct lending, most are comfortable with their current positions, said Jeffrey Griffiths, global private credit specialist at advisory firm Campbell Lutyens. He expects 2020 will be a similarly robust period for fundraising provided the U.S. economy stays strong.

“Investors are happy with their allocations and are just sitting on them and not necessarily growing them as quickly,” Griffiths said.

To contact the reporter on this story: Kelsey Butler in New York at kbutler55@bloomberg.net

To contact the editors responsible for this story: Natalie Harrison at nharrison73@bloomberg.net, Claire Boston

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