The $1.6 trillion private credit market is attracting interest from all corners of finance. But only a handful of firms are really reaping the benefits.

The top dogs in direct lending such as Ares Management Corp. and Blackstone Inc. are deploying over half of the market’s capital, according to a new report by the Alternative Credit Council, an industry body for private credit funds that’s affiliated with the Alternative Investment Management Association. That’s troubling news for the legions of newcomers vying for a piece of the action of Wall Street’s hottest market.

While barely a week has gone by this year without news of another asset manager seeking to break into the fee-rich area, the largest incumbents have a stranglehold over deals. About 58% of the total capital deployed by private credit managers globally is estimated to come from firms that lend more than $10 billion per year, according to the ACC report released on Thursday.

“The evident consequence of this trend is that the market is becoming increasingly concentrated in the larger lenders,” according to the report.

Private lenders have swooped into a void left by banks shying away from riskier loans amid fears of an economic slowdown. In 2022, the last year for which data is available, direct lenders deployed $333 billion of cash, an increase of 60% over the previous year, according to estimates in the report.

Since early 2022, banks have struggled to sell loans stuck on their balance sheet, causing them to be cautious about underwriting new leveraged buyouts. If they start to regain their appetite these larger lenders may see renewed competition for jumbo deals.

How Private Credit Gives Banks a Run for Their Money: QuickTake

But as the market grows, the biggest, established players are becoming more dominant. Blackstone just raised $8 billion in the first close of a new direct lending fund. Oaktree Capital Management is looking to raise more than $18 billion in what would be the largest-ever private credit fund.

Blackstone Gets $8 Billion in First Close of Direct Lending Fund

They’re also able to marshall more cash for individual deals. For example, direct lenders are working on providing a €4.5 billion ($4.9 billion) unitranche loan to support a potential take-private of online classifieds company Adevinta.

Peter Lockhead, co-head of ICG’s direct lending strategy, said in ACC’s report that private credit managers “currently are the only solution for many borrowers.”

The Financing The Economy report, produced in partnership with SS&C Technologies, collected answers from 56 private credit managers and investors collectively managing about $914 billion. It found that the biggest factor affecting private credit firms’ portfolios is the increase in interest rates.

While this is a boon for lenders because they collect higher rates on loans, there’s also a risk that companies will struggle to keep up their rising debt burdens.

“The real focus for us now is absolutely on liquidity,” Blair Jacobson, the co-head of European Credit at Ares, said on the sidelines of the SuperReturn Investor 2023 conference in Zurich this week.

Some are already feeling the strain. Direct lenders have recently taken the keys to a number of businesses that have breached loan terms. About 8% of respondents said that over 21% of their portfolio has needed distress-type interventions such as covenant waivers, payment holidays and cash-to-PIK — effectively paying interest with more debt — in the past year.

“We are vigilant because macroeconomic and geopolitical conditions are still volatile and there remains uncertainty around how the elevated rate environment will play through for some of these borrowers,” Marc Chowrimootoo, a portfolio manager at Hayfin Capital Management, said in the report.

Deals

• Blackstone Inc. and KKR & Co. have closed a $450 million private debt financing for New York-based hospitality and hotel management company Highgate
• Investment banks and private lending firms are working to provide as much as €3 billion of debt to back a potential buyout of German metering company Techem GmbH
• Golub Capital is leading a $2.25 billion unitranche loan for Enverus, a provider of data and analytics for the energy and power industry
• Warburg Pincus’s affiliate Adventure Holdings has obtained a $75 million private loan from Muzinich and Pierfront Capital to refinance its existing debt
• A group of lenders led by Barings closed a private loan financing of more than $1 billion for Thoma Bravo’s acquisition of NextGen Healthcare Inc.
• HPS Investment Partners is poised to provide a roughly €750 million direct loan package for parking-app business EasyPark AB to support its acquisition of a rival firm
• KKR & Co. was lead arranger for a $235 million financing for Shaw Development as part of the company’s acquisition by Madison Dearborn Partners last month
• Partners Group Holding AG is set to finance the potential purchase of Rosen Group with bank funding dealing a blow to private credit funds keen to back the deal
• Brothers Mohsin and Zuber Issa are raising $500 million of payment-in-kind debt for EG Group Ltd, a global network of gas stations and snack shops
• Navex Global, a provider of compliance management software solutions, has obtained $1.2 billion of debt from a group of private credit lenders led by Antares Capital
• Blackstone Inc. provided an investment-grade private loan to NextDecade Corporation for the company’s Rio Grande LNG export facility in Brownsville, TX

Fundraising

• Hayfin Capital Management is seeking to raise more than €8 billion from institutional investors for its fifth flagship direct lending fund
• Brinley Partners, led by co-founders Kerry Dolan and Kirsten Hagen, is seeking to raise at least $1 billion for its second private credit fund
• Barings LLC is planning an Australian private credit fund, seeking to provide an alternative to banks and the bond market
• Hong Kong-based Pacific Aegis Capital Management and local financier Oi Wah Pawnshop Credit will launch their $300 million private credit fund on Nov. 30
• Blue Owl Capital Corp. II and FS KKR Capital Corp. are the latest business development companies to tap the US investment-grade market as blue-chip firms front-load deals ahead of the seasonal holiday slowdown in the US
• Oak Hill Advisors plans to start taking investor commitments for OLEND, a new private debt fund set to launch later this month
• Blackstone’s BCRED kicked off marketing for its first private credit CLO: a $394.3 million transaction led by Wells Fargo

Job Moves

• First Eagle Alternative Credit has hired Larry Holzenthaler as managing director, portfolio manager and senior alternatives strategist
• Indonesia Investment Authority has hired Hiroshi Gozali Masehi to focus on hybrid capital
• Australian credit fund manager Centuria Bass Credit has hired Lachlan Tracey as managing director of head of capital markets and co-head of execution at its Sydney office

Did You Miss?

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• Australia’s Housing Crunch Lures More Private Credit Lenders
• AllianceBernstein Offers Banks Funding in Return for Clients
• Tougher Conditions Threaten Europe’s Private Debt Borrowers: S&P

(Adds description of the Alternative Credit Council in second paragraph)