Private debt fund trio raise $73bn in five years

The top three private debt funds raised more than $73bn in the past five years, underlining the appetite for alternative credit at a time when banks are under pressure to shrink their balance sheets in the wake of the financial crisis.

According to a Private Debt Investor survey, the top fund raiser was Dallas-based Lone Star Funds, which collected $28bn from investors including major pension funds, followed by Oaktree Capital Management with $23bn and Apollo Global Management at $22bn.

Lone Star and its peers have benefited as banks have come under pressure from regulators to sell assets to boost their capital ratios. Lone Star, founded by John Grayken in 1995, has bought several loan portfolios from Germany’s Commerzbank, including its UK real estate portfolio in partnership with Wells Fargo, and its Spanish loan portfolio, together with JPMorgan.Most of the 30 funds included in Private Debt Investor’s list are distressed specialists and only one in the top 10, fifth-placed M&G Investment Management of the UK, is based outside the US, illustrating how little risk capital there is beyond US shores. Together the 30 funds raised a total of $318bn over the past five years.

The total is unchanged from the past survey a year ago, demonstrating how distressed debt funds are continuing to draw new investor money even as the financial crisis eases.

Similarly Oaktree bought a shipping loan portfolio from the UK’s Lloyds bank.

Apollo, which topped the list last year, dropped to third place for the period from January 2009 to the start of June 2014. However, Apollo has $106bn in total credit assets when debt investments are more broadly defined.

The methodology that Private Debt Investor uses includes investors in the debt of private companies, leveraged buyouts, infrastructure and real estate. But it excludes high yield funds, hedge funds that trade debt but do not hold it for any period, and collateralised loan obligations managers.

Jim Zelter, head of Apollo’s credit business, said growth in the alternative credit industry was driven by institutional investors seeking diversity, which ranged from yield to opportunistic.

While distressed investors enjoyed tailwinds from the financial crisis, zero interest rates have meant that in recent years the debt burden of even highly levered companies has become easier to bear.

The opportunity to invest in companies with unsustainable balance sheets has shrunk – at least for the time being, leading Oaktree, for example, to actually return money to investors.

It also focuses on capital raising in the past five years so does not necessarily indicate market power.

Pimco is included at number 17, while BlackRock, the world’s largest fund manager, does not appear at all. Neither does Centerbridge Partners, which along with Oaktree, Apollo and Blackstone, is regarded as a specialist distressed debt investor.

Goldman Sachs is the only bank to appear on the list.