Money managers are saving up and eager to be the lenders of first resort.
They 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.
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. Heightened capital regulations and shrinking risk appetites have made it more expensive for banks to lend to businesses, as they’re not able to provide the immediacy as they have historically been accustomed to.
“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.
That has buoyed demand for more private, illiquid credit products, even though central banks have encouraged banks to lend to the “real economy.” A bunch of investors are eager to fill in the gap 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 and more like a bank.
Oaktree Capital Management currently takes the lead in the US with more than $16 billion in dry powder, according to Preqin. That’s followed by Goldman Sachs’s 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.
These investors are not just loading up on direct lending funds. 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 is preparing for a ‘bonfire of distress,’ 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.