She added, “one of the things we look at when we look at private credit managers is their ability to be differentiated, whether that comes through their networks, whether that comes through their deal flow, whether that comes in origination capabilities.”
Following the financial crisis in 2008, several hedge funds created vehicles to lend to fill the void left with regulatory changes, said Tim Ng, a senior consultant at Fiducient Advisors.
But unlike the early days of the hedge fund industry where two people in a garage with a Bloomberg terminal could start a fund, entering private credit requires building out infrastructure and hiring experts in areas including deal sourcing and underwriting, he added.
“How many good hedge funds are there … that are doing this that are good and how many are Johnny-come-lately’s who are trying to get into the business because it’s the hot dot and being chased by institutional investors?” Ng asked.
Several firms have pushed deeper into private credit and are doing so in different ways from acquiring businesses to building out internal teams and strengthening existing credit capabilities.
The acquisition route
Man Group, which has invested in credit for decades, last year acquired Varagon Capital Partners, a U.S. middle-market private credit manager with $11.8 billion in assets under management at the time.
“On the investor side with rates where they are now, it’s far more attractive actually to invest in both fixed income and credit strategies, and so we’re seeing investors change their asset allocation toward credit and then change it within credit to favor private strategies vs. market or public liquid strategies,” said Eric Burl, Man Group's head of discretionary.
Man Group, which managed $178.2 billion firmwide as of June 30, is on the lookout for new capabilities that could come from an individual hire, a team lift-out or additional merger and acquisition activity, and Burl said must-haves he looks for include an investment process that can deliver outperformance, an investment team that can be underwritten and trusted, and cultural fit.
“We still have ambitions to try and identify new strategies with a particular focus in the U.S. And we like the U.S. because ... the depth and liquidity in the market, so we can invest at scale,” he said.
Europe, including the U.K., is second on the list. “We’ll spend more time here thinking about how we sort of semi-organically grow and add individuals and teams to continue building out both on the public, but more so on the on the private side here,” he said.
And adding private credit capabilities could lead to synergies in other areas. Burl offered the example of Varagon speaking with other teams that work on broadly syndicated loans and CLOs, so as companies move from private loans to the broadly syndicated market, there could be a way to capture more of their life cycle.
Burl doesn’t see a slowdown in demand for private credit.
“It’s definitely fair to say that client demand hasn’t wavered, and I expect that to be persistent for many years,” he said.
Another vehicle
The definition of private credit has evolved since the global financial crisis, and Hildene Capital Management co-CIO Dushyant Mehra said for him it encompasses everything that the banks have left a vacuum in.
“I would argue that structured credit investors have been in the private credit space since we’ve been investing in structured credit. So asset-based lending has always been part of the repertoire of what we’ve done across our careers,” he said.
Hildene launched in 2008 and was doing private credit investing in its hedge funds, Mehra said. The firm officially launched a private credit business in early 2022 with a focus on housing, especially nonqualified mortgage lending, and has a strategic relationship with CrossCountry Mortgage. Hildene manages $15.2 billion firmwide and its private credit business has $194 million in AUM.
“Hildene has historically had hedge funds. That’s what we were founded out of. But a lot of what you’re doing in the hedge fund, effectively, is private credit,” said portfolio manager Justin Gregory. “It’s what people have branded as private credit today.”
Having a private credit structure gives the “ability to get more concentrated in it, supersize it, form a relationship with the underlying originator…and then do it in another vehicle, which is a longer-duration vehicle, which is meant to hold the equity of those securitizations,” Gregory said.
And being active in both hedge funds and private credit drives ideas in both, Gregory said. “What we do with hedge funds is driving new relationships that we figure out in the private credit side,” he said.
With partnerships, evaluating several tenets is key, including are capital markets strong and will they be into the future, having control of the credit and understanding it and having a pricing advantage, Mehra said.
“There’s a lot of private credit funds that have been raised, but not a lot that are competing in the markets that we are looking at,” Mehra said. “So, there will always be opportunities because there is growth of capital at the end of the day, there's a big vacuum to fill that the banks have left behind.”
Finding synergy
Launched in 1995, King Street Capital Management was founded as a hedge fund focused on distressed debt. Over the years, the firm has invested across credit including performing, stressed, distressed, corporate, structured, asset-backed and real estate, said Ed Testerman, a partner on the U.S. research team.
“We thought that it made a lot of sense and was very synergistic with the existing business to launch our private opportunistic credit business. And so that was a big part of the rationale,” he said.
In 2022, the $26 billion firm launched a dedicated private credit strategy and today has over $1 billion in opportunistic private credit assets under management.
“There’s a lot of track record and experience that you can leverage because, yes, you’re providing longer duration capital, but at the end of the day, the same underwriting and structuring acumen that is required to think about or invest in a stressed liquid credit is not so dissimilar,” he said.
Having a dedicated strategy, Testerman said, is also important when thinking about deploying capital into private assets.
And Testerman said being able to use the skill sets of an entire credit platform is a key differentiator.
“It allows us, from a sourcing perspective, to leverage the relationships that we have across the entire firm,” he said. “There’s no competitive tension, as we think about being able to leverage our sponsor relationships and leverage our adviser relationships, and we can work with our CLO team to identify issuers that may have a capital need where we can reverse into them with a private solution.”
Adding specialists
Greg Lippmann, CIO and founder of LibreMax Capital, started his firm 14 years ago with a hedge fund and the goal to grow into a diversified, securitized credit manager. LibreMax has approximately $10.5 billion in assets under management including $1.1 billion in private credit and asset-backed finance.
As private credit has grown, additional skill sets were needed. “You need a lot more document negotiators for private credit,” he said, noting that they have added people as they have expanded.
Growing into different areas has also had benefits. “What does happen is the knowledge we have from the securitization market helps on the private credit pre-securitization side of the business,” he said.
Lippmann is expecting to see investors turn increasingly to other areas of private credit in coming years.
“As the broader private credit market has matured and as people’s allocations to that space have grown there has been more interest in looking at asset-based finance,” he said. “There is a lot of interest in asset-based finance today, even compared to five years ago.”
Building out private credit
Daniel Loeb’s hedge fund Third Point said earlier this year it would invest in private credit. Loeb, speaking at a conference in May, said it was a “bond and credit pickers market” with many stressed opportunities to examine. As of Dec. 31, the firm managed approximately $10.4 billion on a discretionary basis.
Third Point has brought on Chris Taylor, Jennifer Cotton, Sunil Mehta, Mikhail Faybusovich and Matthew Ressler for its private credit effort. A spokesperson for the firm declined to provide further details on the effort.
Greg Coffey’s Kirkoswald Asset Management, which has about $8 billion in AUM, made its first private credit move with a senior secured loan to a Turkish textiles exporter, Bloomberg reported in August. The firm hired Alex von Sponeck and Simon Watt as portfolio managers for private credit. A spokesperson for the firm declined to provide more details on the firm’s efforts.
Corbin Capital Partners, which has evolved into a broader alternatives manager from it hedge fund-of-funds roots, first launched its private credit strategy in 2014 and has a focus on niche areas including secondaries and specialty finance. The firm has approximately $9 billion in total AUM.
And Magnetar Capital, with approximately $17.5 billion in AUM, is pursuing a broad range of credit investment areas. Its website lists a variety of areas from automotive lending to music royalties.
Entering segments of private credit, such as asset-based lending, requires specific tools and technology in addition to specialists with track records, said Darius Mozaffarian, president of White Oak Global Advisors, a private credit firm focused on small and middle-market businesses.
“No. 1 you need capital. In order to, in my opinion, be successful in private credit you need to be able to have a diversified book and the capital to write a large check so you don’t have concentration issues,” he said.
