While a great track record, superior performance and an attractive investment strategy are prerequisites for any fund manager looking to raise capital in a competitive environment, the growing popularity of the private debt market is creating more opportunities for managers to capture the attention of investors. This is true for established fund managers, but even more so for those raising their first fund within the asset class.
Preqin’s Private Debt Online service shows that a total of 216 private debt funds were launched in 2014, a 14.3% increase on 2013. The number of funds has increased steadily since 2010, when 103 funds were launched. While established managers continue to raise the majority of new funds, their demonstrable success in the asset class and the continued capital inflows into private debt have presented first-time fund managers with opportunities to enter the market with their own offerings.
Experienced fund managers in the private debt space were responsible for 93.2% of funds launched in 2010, while new fund managers accounted for only 6.8%. The proportion of experienced private debt fund managers in terms of the number of funds launched each year has decreased, giving way to new entrants. From 2010 to 2011, the presence of new fund managers saw an increase of 118%, rising from 6.8% to 14.8% of the number of funds raised during the year. In recent years, however, the growth in the number of funds offered by new managers in the private debt space has slowed. The proportion of the number of funds raised by experienced managers versus new managers in 2014 is approximately 70.4% versus 29.6%. As the asset class continues to grow in prominence as a standalone alternative investment strategy, more fund managers are entering the space to gain the attention of keen investors.
As shown in the chart below, the most sought-after strategy in 2014 by first-time private debt fund managers was direct lending, accounting for 21 funds launched. Mezzanine and special situations strategies were the second and third most utilized strategies, with 16 and 14 funds respectively. For experienced private debt fund managers, direct lending was also the most adopted strategy in 2014, with 61 funds launched. Mezzanine was also the second most utilized strategy for established fund managers, but distressed debt was the third most utilized strategy, as opposed to special situations.
Average target capital and average capital raised for funds closed by first-time managers in 2014 was $273mn and $265mn respectively, while the averages for experienced managers were $705mn and $577mn. The average target sizes of distressed debt and special situations funds were $1.23bn and $514mn. These higher capital targets for distressed debt funds may suggest a reason as to why first-time fund managers do not typically prefer this strategy.