Private credit managers are bracing for an expected consolidation among firms in their ecosystem, as a result of capital migrating to larger players and economic upheaval negatively impacting some managers' loan portfolios.
That's expected to make it harder for smaller managers to raise money and stay in business as more capital flows to the bigger players, said Karin Anderson, Chicago-based director, North America credit manager research at Willis Towers Watson LLC.
At the same time, industry professionals predict more mainstream and larger alternative managers will continue their shopping spree, buying up private credit managers to add the growing asset class to their array of investment options.
TPG Inc. is re-entering the private credit business, announcing May 15 that it is acquiring private credit and real estate manager Angelo, Gordon & Co. LP, which has about $55 billion in credit assets under management, including leverage. TPG had $137.1 billion in assets under management as of March 31.
In 2020, TPG separated from its former private credit business, Sixth Street Partners, which now manages $65 billion in assets under management.
In February, MetLife Investment Management announced it was buying private credit manager Raven Capital Management, which had $2.1 billion in assets under management as of Dec. 31. MIM had $571.2 billion in total assets under management as of Sept. 30.
Last year, Carlyle Group Inc. made a number of acquisitions that increased its credit business. They include the acquisition of $15 billion CBAM Partners LLC, which managed collateralized loan obligations and private credit and iStar Inc.'s $3 billion net lease real estate business.
"I think there will be continued consolidation in the industry and a movement toward scale," said Chris Wright, a managing director and the head of private markets at private and public credit manager Crescent Capital Group LP, which had $41 billion in assets under management as of March 31.
"If you look through history in all industries, there are periods of growth and periods of contraction," he said.
Sun Life Financial Inc. acquired a majority interest in Crescent in 2021.
In the bull market, most asset classes were commoditized and returns were much more highly correlated, Mr. Wright said.
"In periods of volatility, returns are less correlated and as a result capital will flow to the best managers," he added. "A period of volatility and differentiation will take place in private credit, which will be more of security selector market."
Returns are more dependent on investing in the right sector and the right companies, Mr. Wright said.
Private equity managers, private credit managers' favorite customer, are having a rocky time of it with fewer deals in the first quarter due to market uncertainty from interest rate rises, inflation and scarcity of debt, among other reasons.
According to PitchBook Data Inc., the number of deals dropped by 9.4% to 2,177 in the first quarter from the prior quarter.
However, as private credit managers amass more assets under management, they can provide financing for larger companies, said Bill Ammons, London-based founding partner and portfolio manager of credit manager AlbaCore Capital Group, which manages $9.5 billion in assets under management.
Indeed, in the first quarter, transaction values rose 11.4% from the fourth quarter of 2022, according to PitchBook.