When banks pulled back after the global financial crisis, private capital swooped in to fill the void.
Credit strategies of all types have been booming. Still, credit industry investors say warning signs are beginning to flash. Leverage is creeping up in the underlying transactions and credit managers are adding debt to their portfolios, debt with strings attached.
One of the biggest sectors of credit and debt strategies — direct lending — barely existed before the Great Recession. In the first four months of 2018, five direct lending funds closed on a combined $4.6 billion; in all of 2009, seven direct lending funds closed on a total of $1.1 billion, according to London-based alternative investments research firm Preqin.
"Going into the crisis we were pretty conservative in the deals we were doing and capital we were raising because we didn't see good value," said Joe McCurdy, a New York-based managing director and head of origination in the corporate credit group at Guggenheim Partners. Guggenheim had $78.5 billion in credit as of June 30.
Since the global financial crisis, the opportunity set has grown, Mr. McCurdy said.
Banks have continuously pulled back from lending because of a combination of stricter regulations and bank executives' belief they can get a better return on equity elsewhere. Meanwhile, expected lower returns in equities and fixed income have pushed institutional investors to move into credit strategies across alternative investment asset classes.
Indeed, global private credit managers' combined assets under management have tripled in size over the past decade to a record $667 billion as of Dec. 31, according to Preqin.
Managers among the non-bank lenders also have grown since the crisis, to the point that they do not always have to find a partner to make large loans, Mr. McCurdy said. "A handful of us have grown and so we can do larger transactions on our own," he said. "If we team up, we can do $1 billion and $1.5 billion loans. Pre-crisis, that just didn't exist."
In the first half of 2018, Guggenheim invested more than $2.5 billion of directly negotiated and private middle-market loans across first lien, second lien, unitranche and other structures.
The five credit managers estimated by Preqin to have the most private credit dry powder as of June 30 are GSO Capital Partners (which is Blackstone Group's credit business), Oaktree Capital Management LP, Ares Management LP, Intermediate Capital Group PLC and HAres Managementanagement LP, Ares Management LP, Intermediate Capital Group PLC and HPS Investment Partners LLC.