Ropes & Gray Hosts 2024 Credit Funds Forum

Ropes & Gray hosted its 2024 credit funds forum on June 4, examining the challenges and opportunities within the credit funds industry. The forum featured insights from partners across the firm as well as industry experts, on topics including new fundraising strategies, asset management M&A, liability management considerations and more.

New Fundraising Strategies – Credit Deployment and Product Review

Asset management partner Jessica Marlin moderated the New Fundraising Strategies panel, which featured panelists Byron Pavano, Managing Director, Fund Strategy and Counsel, at Audax Group, Jessica Yeager, Vice President and General Counsel for Private Credit at Bain Capital, and Michael Doherty, co-head of Ropes & Gray’s global asset management group. The panel discussed emerging strategies for credit deployment and the factors driving the increased utilization of evergreen private funds, rated note feeder funds for insurance companies, and registered investment products in the credit space. The panelists first examined the popularity of “evergreen” private funds—these funds come in two flavors – either a closed end private fund that consists of multiple series of closed end funds where each limited partners’ commitment automatically renews for the next series, or the open ended version, which raises capital indefinitely but has certain options for liquidity, usually with long lock up periods and slow pay or liquidating capital account features. They discussed the appeal of evergreen funds for sponsors in ideally lessening the ongoing fundraising burden, and for certain classes of investors, including high-net worth individuals, due to the ability to deliver steady returns and offer increased opportunities for liquidity.

The panel continued discussion with an overview of rated note feeder funds for insurance company investors, which the panelists agreed are increasing in popularity, including for investors in Europe and Asia. Despite continued success stories with structuring rated note feeders, the panelists agreed that these products require a complicated sales pitch to investors due to factors such as desired note rating and the varying preferences for the debt-equity split. The panelists stressed the importance of bringing together all of the key stakeholders at a firm to determine whether there is a fit for the product in the market and how to structure up front in order to better match the product to the desires of prospective investors. The discussion concluded with a detailed look into registered funds in the credit space and how these registered products fit with private credit. Michael discussed the unique features and complexities of registered funds, and offered comparison between interval funds, business development companies, and tender offer funds. The panel emphasized the difficulty of standing out in the market for registered credit products today. Michael highlighted the complexity of complying with the Investment Company Act, which can present unique challenges for sponsors who have raised solely private funds to date. The panelists also focused on the critical component of distribution of these products and determining up front how you intend to sell it.

Managing the New World of Liability Management Transactions

Ropes & Gray business restructuring partner Natasha Hwangpo moderated a panel discussing the evolving landscape of liability management transactions and related considerations for credit funds. Joining her were finance partner Leonard Klingbaum, business restructuring partner Matt Roose, and tax partner Eric Behl-Remijan. The panel discussed the different varieties of liability management transactions, including up-tiers, drop-downs and double-dip transactions, and the opportunities, advantages, and risks presented by such transactions to both borrowers and credit funds. The panel elaborated on the drivers behind the increased prevalence of these transactions in the marketplace, including how they play a role in mitigating bankruptcy filings by preserving liquidity and postponing debt maturities, while allowing participating credit funds to enhance the recovery on their existing capital, provide for downside protection, and an opportunity for both existing creditors or those new to the capital structure to deploy fresh capital into a more protected position. The group also discussed the implications of such transactions for participating vs. non-participating creditors, and the importance of early tax planning to ensure no surprises. Other topics included the role of cooperation agreements in liability management transactions, considerations for credit funds in deciding whether to join a group, including economic and non-economic considerations, and reputational and potential litigation considerations in pro rata and non-pro rata transactions. The group also provided insights into the signs that a borrower may be ready to engage in a liability management transaction and other tips for credit funds to monitor their portfolio, and how legal and business professionals generally fit into the process. The panelists concluded with a discussion of their views on the contemplated future of liability management transactions.

M&A – Trends in M&A of Credit Fund Managers

Co-head of the asset management M&A group and private equity partner Scott Abramowitz moderated the asset management M&A panel, which featured panelists Chris Moore, Partner at TPG and General Counsel at TPG Angelo Gordon, and Shannon Collins, Managing Director in Investment Banking at Goldman Sachs. The panel analyzed recent trends in M&A of credit funds managers, utilizing the 2023 TPG-Angelo Gordon acquisition as a practical example. Emphasizing an increasing number of factors that drive buyers to enter these types of transactions, such as the ability to offer more products, opportunities for growth, and public market investors looking for more diversified managers and multiple asset classes, the market currently offers a wide range of traditional and non-traditional acquisitions, reflecting buyers’ increased flexibility in terms of what types of deals they will consider in order to meet sellers where they sit. The panel discussed multiple influences that guide such transactions and highlighted the importance of culture. Relationship building, commitment to growth, developing talented teams through young leaders, and compatibility in objectives all play significant roles in entering these partnerships, especially for those firms entering the founder-transition mode, because they produce long-term, successful harmony. Looking forward, the panel noted these types of transactions have been drawing increased interest, which exponentially produces awareness and motivation, though they noted firms’ experiences have been mixed. Ultimately, such a transaction is likely to remain buyer-specific.

Current Outlook – Innovative Fund Strategies and Private Credit in 2024

The Current Outlook panel was moderated by asset management partner and leader of the firm’s credit funds team Laurel FitzPatrick. She was joined by Richard Byrne, President at Benefit Street Partners, Mobi Ahmed, Principal at Centerbridge, and Marco Prono, Managing Director, Co-Head Direct Lending-Portfolio Management at J.P. Morgan. The panel examined innovative fund strategies and the outlook of private credit for the remainder of 2024 and into the coming years, noting that private credit is experiencing growth this year, despite a significant slowdown in 2023 due to interest rate increases. The group discussed recent trends in funding sources, private credit’s success in raising and deploying capital, the amount of dry powder in the market, and the investment opportunity presented by lower quality assets. Other topics included the shifting role of banks and opportunities for credit funds as alternative capital providers, and the effects that rising interest rates and narrowing spreads have had on the investment landscape. The panelists also discussed similarities and differences between corporate and real estate lending and highlighted the concentration of real estate debt held by regional banks and the near-term maturities coming to bear. The panel concluded with a discussion of global macroeconomic trends and their effect on private credit’s participation in the market.