Private debt’s attractive risk-adjusted returns are increasing its popularity among investors. Despite this, raising capital is still no easy feat for fund managers operating in this space.
Private debt’s attractive risk-adjusted returns are increasing its popularity among investors. Despite this, raising capital is still no easy feat for fund managers operating in this space. Below, we look at the top challenges managers face when raising capital from investors, and provide key solutions to overcome them.
Appetite for larger funds is growing
Private debt remains dominated by larger funds, with the 20 largest accounting for nearly 60% of the total private debt capital raised in 2021. This trend is being encouraged as large investors look for similarly large fund managers that can deploy large sums. The average size of funds closed has increased from $525mn in 2015 to $933m in 2021. Overall, last year private debt funds raised a record amount of capital with fewer, yet larger, funds closing. Aggregate capital increased 14% in 2021 to $193bn across 202 funds, down from 255 funds in 2020. All of this makes conditions particularly challenging for newer fund managers, which tend to have smaller average fund sizes.
A market dominated by big players
Investors are also targeting larger GPs. As more investors become advanced in their investment programs, it can be increasingly attractive for LPs to recycle capital distributions into existing relationships – making it increasingly hard for GPs to establish new relationships. The average size of funds in market rose to $958mn in 2021, from $663mn a year earlier.
Much of this was driven by larger US-based managers raising funds with increasingly high targets, both for their domestic market and Europe. Ares Management Corporation (Ares) closed two direct lending funds, Europe V fund ($13.24bn) and Pathfinder Fund ($3.6bn), during the year. Ares’ Europe fund, which closed in April 2021, was 72% larger than its predecessor fund, Europe IV, which was the second-largest private debt fund that year, raising $7.68bn. Though slightly smaller, HPS Investment Partners closed its Specialty Loan Fund V in September with $11.7bn in capital commitments. This senior direct lending fund was 1.6x larger than its $4.5bn 2017 predecessor.
Over the past decade, Ares has led its peers in private debt capital fundraising. The Los Angeles-based manager has gathered $55.3bn in capital commitments over that time across 25 funds. Goldman Sachs ($47.1bn) and Blackstone ($44.9bn) are also among the top managers in the asset class by capital raised.
The solutions
Save time by focusing on LPs most active in private debt
For most fund managers, capital concentration is the biggest challenge. To overcome this, you need to focus your time and resources on reaching out to investors who are actively allocating capital to funds like yours. Building your target list based on the type of investors that are the most active in the asset class can be a good start. Narrowing your target in this way can help reduce time spent on the road raising capital – and the quicker you achieve your fundraising target, the quicker you can invest that capital into companies to gain a competitive advantage over your peers.
Preqin tracks over 5,400 LPs active in private debt globally on Preqin Pro. See how our detailed profiles of large public institutions through to individual family offices, and everything in between, could help you achieve your fundraising targets by requesting a demo today.
Identify LPs with relevant mandates for private debt
To further focus your target list when fundraising, you can also prioritize LPs with mandates to invest in private debt funds like yours.
As of July 2022, Preqin tracks over 390 LP mandates and RFPs for the private debt asset class on Preqin Pro, with detailed plans on how they will allocate to the asset class over the next 12 months. See how this data could help you boost your fundraising activity by requesting a demo today.
Analyze LPs’ current vs. target allocations in private debt
Finally, focusing your efforts on approaching LPs that are currently below their target allocations for the asset class can increase your chances of success when fundraising. Separating over-allocated LPs from under-allocated LPs will help you pinpoint the right investors to approach.
Your key to the alternatives market
Preqin Pro gives you access to the industry’s most comprehensive private capital and hedge fund datasets and tools. Find investors searching for investment opportunities like yours. Be the first to know about new investor searches and mandates. Build your pitch with detailed information on investors' past activity and future plans, and drive a successful outreach with details on key personnel and their preferred method of contact.
Preqin also publishes institutional research via Preqin Insights+, providing analysis of investor sentiment through regular investor surveys and exploring the fundraising environment across various markets.