Money managers are saving up and eager to be the lenders of first resort.
Private-debt fund managers have amassed a record high $199 billion in untapped capital as of June, according to the latest report by Preqin. That’s a significant jump from the $72.9 billion in 2006.
Banks are retreating from the lending space amid heightened capital regulations. Wall Street’s concerns with liquidity, or how easily you can buy or sell an asset without shaking up prices, is well documented in the bond market.
That has created an opportunity for firms that operate like shadow banks.
A bunch of investors are eager to fill in the gap left behind by banks by providing credit directly to firms that dislike the terms, or have trouble borrowing from banks and the bond market. Apollo Global Management, for one, is acting more like a bank.
“Institutional investors that seek exposure to sub-investment grade credit have a spectrum of more and less liquid products from which to choose,” Jeffrey Griffiths, principal of financial advisory firm Campbell Lutyens & Co., wrote in the report.
Oaktree Capital Management has more than $16 billion in dry powder, according to Preqin. That’s followed by Goldman Sachs’ merchant-banking division at $11.5 billion, and Blackstone’s credit arm, GSO Capital Partners, at $7.9 billion.
Here is Griffiths again (emphasis added):
“The growth of private debt funds, structured as closed-end limited partnerships with defined investment and harvest periods, is a natural and appropriate development for a market in which investors can rely less on market liquidity and mark-to-market valuations. These structures can allow investors to gain access to an increasingly illiquid asset class, typically via an experienced manager, without having to suffer the short-term, volatile mark-to-market moves that can strain the market for mutual funds, ETFs and BDCs. They can also allow for opportunistic buying of assets during market drawdowns when other structures may need to forcibly sell assets to meet redemptions.”
It isn’t just direct lending funds, either. Mezzanine funds have a record $46.7 billion, according to Preqin. Dry powder for distressed debt, or bonds of companies nearing bankruptcy, increased to $63.3 billion as of June.
Business Insider has previously written about how alternative investors like Oaktree are preparing for a “bonfire of distress” and why the buildup of distressed debt is a “coming attraction,” particularly for those eyeing struggling energy companies.
All eyes will be on these investors putting their money to work.