Level of cash raised by loan funds fell in 2016

The level of cash asset managers raised to lend to businesses fell to a four-year low in 2016, after fears of a global slowdown and increased regulatory scrutiny rattled investors.

Direct lending funds, where asset managers provide loans to companies, gathered a total of $23.2bn last year, down from $40.5bn in 2015, according to figures from Preqin, the data provider.

It marked the first time since 2011 that the level of cash raised by loan funds fell compared with the previous year.

The direct lending industry had experienced rapid growth in recent years after rules introduced to shore up bank balance sheets since the financial crisis left traditional lenders reluctant to provide loans to some businesses.

Floris Hovingh, a director at Deloitte, the consultancy, said that despite growing interest from investors in direct lending, the industry had experienced “volatile fundraising” last year.

“[The] Brexit [vote] and US elections have not helped the global fundraising environment,” he said.

The fall in the level of fundraising comes as regulators across the world increasingly scrutinise direct lending, amid concerns that asset managers are becoming so-called shadow banks.

In a report published last week, the International Organization of Securities Commissions, the association of securities regulators, said: “[Loan funds] are quite different from traditional funds, and have not yet been closely scrutinised.”

It warned of systemic risks from excessive credit growth, as well as investor protection and liquidity risks, linked to the rise of direct lending funds.

Owen Lysak, a senior associate at Clifford Chance, the law firm, said asset managers should prepare for more regulatory scrutiny of direct lending funds, especially of the “nitty gritty” of how they assess borrowers, liquidity and use of leverage.

Chris Redmond, global head of credit at Willis Towers Watson, an adviser to big investors, said mooted regulatory changes are a headwind for direct lending funds.

But he added: “We do not observe any diminution of interest across the market. Indeed, ever more big pools of capital are looking to invest in private debt and a good share of this will make its way into direct lending.”

According to Preqin, 49 direct lending funds were closed to new investors in 2016, down from 64 in 2015.

Many of the biggest companies in the sector, such as BlueBay and ICG, had launched direct lending funds in 2015, while smaller funds were brought to the market in 2016, which affected the total levels of cash raised, according to Mr Hovingh.

Fund houses are now sitting on $56.6bn globally to loan to businesses and other borrowers, down from $60bn at the end of 2015.

Christopher Bone, head of private debt in Europe for Partners Group, the Swiss-listed asset manager, added: “We believe that private debt is here to stay for the long term and we expect institutional investors to continue to be attracted to the asset class.”