Private-debt funds seeking $212 billion in limbo after rout

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Private credit funds looking to raise more than $212 billion from investors are now finding their efforts hampered by the continuing spread of the coronavirus.

Over the last two weeks, at least half a dozen lenders to mid-size businesses actively fundraising in North America and Europe have canceled appointments or travel plans to meet with prospective investors, according to people familiar with the matter who aren’t authorized to speak publicly. In Asia at least one private lender extended its fund’s closing to later this year due to the virus, according to one of the people.

“There is likely going to be some slowdown in velocity in terms of fundraising,” said Jeffrey Griffiths, a global private credit specialist at advisory firm Campbell Lutyens. Face-to-face meetings are the most effective way to conduct due diligence, he said. “But also because, obviously, investors are going to look at the volatility of the market and say to themselves, ‘Should I be putting on risk in this market or should I be waiting?’”

Managers with little name recognition in the $812 billion market, which has replaced banks as lenders to small and mid-size businesses, will likely have the hardest time. Investors are drawn to larger, more established fund managers that have a track record through previous downturns and large existing pools of capital.

Last year, the 10 largest funds raised 36% of all capital combined, with only 9% of all cash raised going to first-time fundraisers. Preqin estimates that global private debt dry powder stands at $272 billion this month, signaling that established players will have money to put to work should current market volatility extend.

A record 457 vehicles are looking to raise $212 billion for private debt strategies, according to Preqin. That comes as commitments to the asset class have been slowing. Funds raised $104 billion in 2019, down from $110 billion in 2018. Committed capital hit a record $132 billion in 2017.

“We’re in slightly uncharted territory,” said Tom Carr, head of private credit at London-based research firm Preqin.

The fundraising environment was challenging even before the spread of coronavirus, according to Carr.

Now, some managers are opting for video calls with investors in the wake of scrapped travel plans. For those funds that are tapping repeat investors, the immediate impact may not be as severe, since the familiarity with the strategy already exists.

“It seems like it’s going to have an effect on fundraising in the short-term, but whether that’s a long-term phenomenon remains to be seen,” Carr said.

Bloomberg News