H1 2020: Alternative funds launch with $158bn amid continued investor appetite

There was a noticeable decline in fundraising following the fallout from the COVID-19 pandemic as the second quarter, by many measures, was considerably slower than the first quarter of the year. Though, throughout the second quarter period there was considerable appetite for certain strategies including opportunistic and credit strategies as pricing dislocations drove investor demand. According to data compiled by Alternatives Watch and analyzed by Allen & Associates, approximately $158 billion was raised across 70 funds in the first half of the year, though noticeably investor appetite was mostly targeted at established GPs, especially in the second quarter. AW Manager Scorecard H1 2020 Though symptomatic of a virtual fundraising environment, as in-person due diligence meetings went online, investor appetite was mostly targeted at brand name managers with seamless virtual offerings, and a series of mega funds emerging in the late Q2 period -- shedding light on some long lasting trends we could see going forward in the alternatives industry. In a reflection of the newfound interest in distressed credit, a direct effect from the COVID-19 pandemic, Howard Mark’s Oaktree Capital was reported to have amassed $15 billion for the largest distressed debt fund to have ever been raised during the period. At the height of the global financial crisis, Oaktree put in nearly $2 billion to work in the market. The new fund, Oaktree Opportunities Fund XI, is the largest distressed debt fund ever raised. Other notable launches in opportunistic private credit space included Pimco, Ares Management Corporation, Angelo, Gordon & Co., and Apollo Global Management, amassing a total of almost $10 billion during the period. New York firm Angelo, Gordon & Co said it collected $1.8 billion of equity commitments for its final closing of AG Credit Solutions Fund. The $38 billion firm’s flagship closed-ended investment vehicle of the firm’s distressed and corporate special situations activities, employing an all-weather approach to generate risk-adjusted returns in any market environment. Angelo Gordon also announced that it has raised over $1.5 billion in equity commitments for its most recent European real estate fund, AG Europe Realty Fund III, exceeding the fund’s $1.2 billion target and hitting the fund’s hard cap. The new fund will invest in off-market investment opportunities with a focus on sub-performing assets along the entire value-add spectrum, from those with attractive in-place cash flow to distressed assets that require significant capital restructuring and asset repositioning to stabilize. “Significant levels of dislocation and distress in the real estate sector in the U.K. and Western Europe persist, with political uncertainty, weak banks, and sluggish economies contributing to the emergence of new pockets of stress,” said Anuj Mittal, co-portfolio manager of European real estate at Angelo Gordon. Overall, the firm has $35 billion in credit and real estate strategies. Adding to its $2.7 billion private credit haul, Los Angeles-based Ares Management Corp. also capped off the Q2 period with an announced final closing of its Ares Special Opportunities Fund at $3.5 billion of commitments relative to its $2 billion target. The team, led by Scott Graves, invests in stressed and distressed assets and pivots opportunistically between private and public market sourced opportunities and seeks to partner with management teams by embracing an ‘activist for good’ approach. In a further example of trusted brand names taking the lion share of assets during the period, BlackRock set its own record in March with its Global Energy & Power Infrastructure Fund III raking in $5.1 billion, which was its largest alternative investment fundraise in the $7 trillion firm’s history. BlackRock’s two previous infrastructure funds raised $3.5 billion and $4.5 billion each and the new third fund exceeded its fundraising cap. “The milestone is a testament to BlackRock’s focus on helping clients achieve better investment outcomes,” said Edwin Conway, global head of BlackRock Alternative Investors. “Investors are looking to build resiliency into their portfolios and ballast against equity market shocks by increasing their allocations to less correlated exposures in private markets.” In the secondary market, fundraising remained brisk in the early part of the year, though secondary transactions mostly came to a halt because of the pandemic and the uncertainty surrounding valuations. However, recent deal activity suggests a re-engagement in secondary activity as the $96 billion global private equity firm Ardian announced it had closed a record $19 billion in secondary private equity investments late in the second quarter. The secondaries pool includes $5 billion for co-investments, and significantly exceeds Ardian’s preceding secondaries fund, ASF VII which came in at $14 billion in 2016. Blackstone’s Strategic Partners also had blockbuster month in the secondary market in July, having announced the final close on $3.75 billion for Strategic Partners Infrastructure III L.P. The vehicle is the largest pool of capital dedicated to infrastructure secondaries and is the second secondaries fund close for the group this month following the raising of $1.9 billion for Strategic Partners Real Estate VII LP for investment in real estate secondaries. New York-based Blackstone reported $20 billion in investor inflows in the volatile second quarter of 2020. As a result, the storied $564 billion alternative investment giant is sitting on $156 billion in dry powder as it seeks new opportunities in credit and private equity primarily. In the last 12 months, the firm has put more than $61 billion to work after having inflows of $94 billion for the year ending June 30. Approximately $13 billion was put to work in the second quarter alone. Secondaries saw performance gains of over 20% for the year ending June 30. While hedge funds saw a reversal of fortunes in the later part of the period as redemptions slowed and some saw material net inflows, headlining the ongoing pivot from public to private investing, Pershing Square Capital debuted Tontine Holdings, a so-called blank check company, raising $4 billion in an IPO priced at $20 per share on July 22. The Special Purpose Acquisition Company or SPAC will merge with one private company and take it public through a transaction in which stockholders will hold a minority interest in the newly public company. Blank check companies have raised $16.2 billion through U.S. IPOs so far in 2020, according to SPAC Research, easily exceeding the record $13.6 billion in 2019. Overall, recent figures in Q2 2020 out of HFR show the hedge fund industry assets swelling to $3.177 trillion, which represents a record quarterly increase of $220 billion and the asset raise comes as the HFRI Fund Weighted Composite Index posted its strongest quarterly performance gain since the second quarter of 2009 or 9.1% in the Q2 2020. Officials point out that investors rebalanced capital as a result of the pandemic and to position for opportunities in the second half of the year. The pandemic also prompted GPs and LPs alike to evaluate their commitment to environmental, social, and governance – related investing through a lens of social citizenship. While GPs reacted by focusing on social impact initiatives such as providing funding and supplies to medical staff and organizing relief programs, several fund raisings during the period took direct aim at the impact COVID-19 was having on frontline works. Of note, ImpactAssets launched its COVID Response Fund in April, an offering that combines a rapid response charitable giving component with a flexible impact investing model with an initial capacity of more than $1 billion in investment opportunities. The fund seeks to meet the needs of small businesses and individuals as well as companies fighting on the front lines of the pandemic across three groups of beneficiaries -- small business/individuals, frontline heroes and mission-critical changemakers. Under the category of frontline heroes are companies and projects that advance the fight against the pandemic, including treatments and vaccinations, personal protection equipment manufacturing and delivery of health services. Lastly, mission-critical changemakers are those companies that have materially advanced progress on climate change and social equity and whose survival is integral to preserving and continuing that progress.

H1 2020: Alternative funds launch with $158bn amid continued investor appetite

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Craig Allen

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