Private credit managers are in a race to get scale.
We are seeing this from larger fund raises and from M&A. Expect more consolidation as niche players find it harder to originate deals.
Why the rush to get scale?
The big reason is originating assets – as the private credit markets have grown so fast over the last decade, a lot of new entrants have joined the market. Capital has been relatively abundant for managers – and the difficulty now is finding good deals to invest in.
Big players can outcompete small players in this – they can create (or buy) their own origination platforms – which smaller players cannot afford, they can go for deals that are too big for smaller players, and they will often get prioritized by investment banks and brokers when they are intermediating deals because they are more important clients.
This is different to liquid markets like global macro hedge funds – where sourcing is a relatively level playing field. It is also a scaling market – unlike smaller markets for asset types like distressed debt.
Trouble then compounds for smaller players when raising funds – as LPs then pick to invest in big funds who can originate more than smaller funds who might have trouble deploying their capital.
Essentially there are economies of scale in this business.
Opportunities for smaller funds
There are opportunities for smaller funds if they can find areas in which they can innovate and offer products that larger funds are unable to offer. This is difficult to maintain though – as information flows fairly freely in this business. Nonetheless – if they can stay one step ahead by being smarter and more nimble, that could be a strategy.
Also if a smaller fund is able to create its own proprietary origination platform – for example by entering an exclusive partnership or right of first refusal relationship with credit originators – that could be a strategy that works.
Another strategy could be finding a specialist market in which there are barriers to entry. Emerging markets which have controls on investment by foreign managers could be one. Or emerging markets in which a manager is better placed to be able to service and enforce on loans than large global managers.
In any of these cases, if the manager is successful, they are likely to quickly have larger managers knocking on their door to buy them.
Longer term – skill > scale
As the market evolves, we will see some areas in which manager credit investment acumen becomes more important than scale – and there will be space for smaller specialist players.
A relatively near term one is if we start to see existing private credit deal defaults increase. Specialist managers who have special expertise in working through distressed situations might win there. Skill could be more important than scale. This may be relatively difficult to scale as different managers will be skilled at different underlying asset classes and geographies of distressed loans.
Another area will be private credit secondaries. As this market grows, if smaller managers can develop better pricing models – this could be an area in which smaller managers could succeed as scale is less important.
A third is as the market develops to intermediate borrowers and private credit managers. The process is still currently inefficient and relationship driven. Over time, infrastructure solutions are likely to be developed that reduce the need for private credit managers to have their own origination teams – at least for some asset classes. For example, for lending against consumer loan asset pools or for direct lending to mid-market corporates, we may see fintech or traditional finance solutions emerge.
Janus Henderson and Victory Park Capital
Janus Henderson has AUM of $360bn. It is London headquartered and invests in equities, fixed income and alternatives. The firm was created in 2017 from the merger of Janus Capital Group and Henderson Group.
Victory Park Capital was founded in 2007 and is headquartered in Chicago. Since 2010, it has specialized in asset-backed lending – including SME and consumer finance, financial and hard assets, and real estate credit. It has invested over $10bn across over 220 investments. Its AUM is $6bn.
Janus last month bought National Bank of Kuwait’s emerging markets private investments team – NBK Capital Partners. It is renamed to Janus Henderson Emerging Markets Private Investments.