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Fund Performance

Public PE firms ride rising tide of private credit

The private credit portfolios held by seven public PE firms posted a higher median return than their PE strategies in 2023

Private credit may be a silver lining for the largest PE firms, especially when their bread-and-butter buyout businesses face a challenging environment.

Private credit portfolios held by seven listed PE managers—KKR, Blackstone, Apollo Global Management, Ares Management, The Carlyle Group, Blue Owl and TPG—produced a median gross return of 16.4% for 2023, according to PitchBook’s latest US Public PE and GP Deal Roundup.

In comparison, their PE strategies achieved a median gross return of 9.8% for the same period, which is below the double-digit returns that investors had been used to for much of the past decade. Notably, it was still an improvement following 2022’s low of 5.2%. (PE metrics for Blue Owl are not included as it does not make direct investments in companies.)

Several unfavorable market conditions, such as high borrowing costs and a tepid exit environment, hampered the investment strategy’s ability to deliver better returns last year, said Kyle Walters, PitchBook associate PE analyst and co-author of the report.

Exits have been subdued, putting pressure on the distribution pace of these managers. Carlyle’s PE strategies posted a significant decline of 59.1% in realizations for 2023 to $6.5 billion, the report showed. KKR similarly posted a 47.2% decrease.

Only Blackstone and Ares saw their PE realizations increase from the previous year.

“A lot of these firms have mentioned that exits are going to be slow in the first half of this year,” said Walters. “But they might start to see a pickup in realizations towards the back half of the year and going into 2025.”

In KKR’s latest earnings call, CFO Rob Lewin said the firm has a “healthy pipeline” of exits coming into 2024 but that regulatory approvals may create some uncertainty around timing.

Despite its sharp drop in realizations on a year-over-year basis, the results of Q4 were a positive sign for the firm. KKR’s $3.3 billion in PE realizations represented the highest quarterly figure among the seven firms and a quarter-over-quarter rise of 6.5%.

Apollo leading the charge

Compared with the predicament faced by PE, private credit had a bumper year in 2023, in which the asset class benefited from various tailwinds that spelled ample opportunities for non-bank lenders. And the largest public PE managers are taking advantage.

Among them, Apollo appears to be the most active proponent of private credit. The firm reported $97 billion in debt originations for the entirety of 2023, with $30 billion generated in Q4 alone. This impressive transaction volume brought the lender one step closer to its ambitious target of reaching as much as $250 billion in annual debt originations in the next five years.

Apollo’s private credit portfolios, which include corporate direct lending and asset-based financing, yielded a gross return of 19.8% in 2023, outpacing the other GPs.

“In a higher interest rate backdrop and with lingering impacts of the effect on traditional private equity allocations, institutional investor focus has pivoted to asset classes that offer current income, inflation protection and access to areas of secular growth—namely credit, infrastructure and sustainability,” said Apollo co-president Scott Kleinman during the firm’s earnings call.

Apollo has been raising capital for credit strategies, including direct lending, asset-backed finance and opportunistic credit strategies, to take advantage of the growing demand for private credit among institutional investors. The firm is also looking to broaden its private credit offerings to wealthy individuals by incorporating asset-backed finance.

Over the past two years, private credit has gained greater traction with investors. In Q4, the seven public managers raised $168.7 billion for all strategies combined—with credit alone fetching 59%.

Featured image by Peathegee Inc/Getty Images

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