HPS Investment Partners has raised $12bn for a new junior credit fund, pushing the private credit firm’s assets under management to nearly $100bn as it becomes an increasingly formidable player across debt markets.
The fund immediately becomes one of the largest pools of junior credit available to private equity groups and companies, when traditional investment banks are further retrenching from speculative corners of finance and dialling back lending to riskier businesses.
Turbulence in public markets sparked by the US Federal Reserve’s decision to aggressively raise interest rates in its bid to tame inflation has many big asset managers salivating over an opportunity to step in where banks may not.
Rivals to HPS, including credit specialist Oaktree Capital, are raising billions of dollars for new private credit funds.
“Banks have severely limited their exposure to this particular area of the credit market,” said Scott Kapnick, chief executive of HPS, referring to junior credit, which ranks below more secure forms of borrowing. “They do not want to be left holding junior capital. The recent crisis with Silicon Valley Bank and the regional banks will make it even more of a focus for banks to be cautious.”
HPS was founded in 2007 as a division of Highbridge, JPMorgan Asset Management’s hedge fund unit, and was spun off in 2016. It has become one of a handful of go-to lenders offering large loans that used to primarily be the purview of traditional banks, and now routinely goes shoulder to shoulder with Apollo and Blackstone in funding large but risky takeovers.
Its new fund — known as Strategic Investment Partners V — plans to buy risky debt, including junior loans and convertible bonds, as well as preferred stock. The firm surpassed its $9.5bn fundraising target and expects the fund to eventually invest $17bn when it taps loans from Wall Street banks, a common practice for private equity and credit funds, according to people briefed on the matter.
Last week it took part in a $3.84bn debt sale tied to the buyout of software group Citrix, picking up the junior bonds at a deeply discounted price when lenders led by Goldman Sachs and Bank of America raced to cut their exposure to the takeover.
HPS has already invested more than a third of the $17bn it plans to put to work, including loans to wireless provider Consumer Cellular and Authentic Brands, the company behind Brooks Brothers and Reebok. The fund will generally make individual investments worth between $250mn and $750mn.
It is one of the largest funds ever raised to invest in junior credit, eclipsing an $11.7bn “mezzanine” fund Goldman Sachs Asset Management closed earlier this year, according to data provider Preqin. That fund expects to invest north of $15bn after it taps its own loans from Wall Street lenders.
Investors have been drawn to the relatively high returns on offer from private credit funds, with riskier loans often yielding 14 per cent or more. While that trails returns marketed by private equity funds, it has proven attractive to pension funds and endowments after a decade of rock bottom interest rates.
Scot French, a governing partner at HPS who will manage the new fund, said companies must refinance significant amounts of debt coming due in 2024 and 2025, and the new higher interest rate environment will make this more complex than in the past.
“They need to find some solution to get their capital structures amended and extended. They’ll possibly need common equity or a more bespoke piece that a firm such as HPS can offer.”
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