State-owned investors are betting that tighter bank lending will present new opportunities in private credit, with Canadian funds joining their Middle Eastern and Singaporean peers in backing non-bank lending.

Rising interest rates are boosting returns and direct lending deals are done with companies with high quality cashflow, offering an attractive risk-reward profile. At the same time, volatility in public markets is pushing many investors away from traditional bond and loan offerings towards private credit.

Sovereign wealth funds and public pension funds are stepping into the breach as banks have exercised caution in the face of hefty losses as default rates climb. They benefit from lower liability constraints that enable them to take on more liquidity risk than banks. Their greater risk appetite is driven by their long-term investment horizon. The asset class was notably resilient amid the pandemic with managers successfully protecting their portfolio values as well as deploying dry powder to add assets.

Backed by state-owned investors, private credit managers are filling the gap left by banks and buying debt portfolios, raising more long-term capital and providing finance for high yield non-investment grade debt that traditional bank lenders will not touch. Private credit funds had assets under management of US$1.6 trillion by 2022, up 53% from 2017 according to Intertrust Group. The private credit industry has grown at a rate of 14% per year on average since 2000, according to Bank of America Merrill Lynch.

Tapping into this growth, Canada’s US$96 billion OMERS has teamed up with Goldman Sachs Asset Management (GSAM) to launch a separately managed account that will invest in private credit opportunities across the Asia-Pacific region. Investments target the senior direct lending, mezzanine and hybrid opportunities. OMERS already has a high exposure to credit, with 18% of its portfolio (US$17 billion) allocated to the asset class, while 11% of assets are in the Asia-Pacific region. At end-June, OMERS reported that it achieved a 3.0% return in the credit asset class.

Kal Patel, executive vice president and head of global credit at OMERS, said, "Private credit remains an attractive area within the credit space globally, and the expansion of our existing relationship with Goldman Sachs into Asia will position us well to further unlock these opportunities. Asia is a growth region for OMERS, and we look forward to working alongside Goldman Sachs to achieve our long-term targets as well as participate in the growth of the direct lending markets in Asia.”

Meanwhile, another Canadian state-owned investor, British Columbia Investment Management (BCI), the Abu Dhabi Investment Authority (ADIA) and asset manager Centerbridge have announced they are backing a US$5 billion private credit fund launched by Wells Fargo that will lend to midsized US companies. The new fund is targeting US$2.5 billion of equity commitments, with ADIA and BCI pledging US$2 billion.

Few sovereign wealth funds can match Mubadala’s aggressive push into private credit markets. This month, the sovereign investor announced the formation of a strategic partnership with New York-based alternative asset manager Blue Owl Capital to co-invest in private credit opportunities. Mubadala has committed US$1 billion to Blue Owl’s credit platform and will initially focus on its technology lending strategy, which provides financing solutions for several technology and software companies.

The Blue Owl transaction tops a heavy year of investment in private credit by Mubadala. In January 2023, it pledged US$2 billion to an Abu Dhabi Global Market- (ADGM) based US$2.5 billion joint venture with Alpha Dhabi to co-invest in private credit opportunities over the next five years, in a strategic partnership with Apollo. It followed this up in March with a joint venture with Ares to invest in global credit markets, starting with an initial target of US$1 billion. The Abu Dhabi fund is building on a relationship with Ares that began in 2017, but it has worked with other asset managers in the private credit asset class.

Mubadala also purchased asset manager Fortress Investment Group from SoftBank Group for US$3 billion in May. Fortress has nearly US$50 billion in assets under management and its inclusion in the Mubadala portfolio would make the Abu Dhabi sovereign investor one of the world’s biggest credit investors.

Its other alliances in private credit include an Asia-focused partnership with KKR, founded in October 2022 to invest at lease US$1 billion, and a partnership with Barings – the Barings Mubadala Enterprise (BME) – which was founded in 2020 focusing on financing solutions for European middle-market businesses with US$3.5 billion disbursed up to Q1 2022.

Last month, Mubadala’s bigger brother in the Abu Dhabi sovereign wealth sector, ADIA, more than doubled its investment in Australian real estate private credit company Qualitas Diversified Credit Investments (QDCI) to A$1.45 billion (US$932 million) as it continues its push into private credit markets. The move demonstrates ADIA’s interest in advancing in the private credit market as the banking sector retreats from the sector, leading to reduced competition and higher margins.

ADIA has a long-standing interest in buying stakes in managers. In 2007, it acquired a 9% stake in US private equity firm Apollo Management and a 20% stake in Ares Management. In May, ADIA was among a group of investors that bought a 20% stake in CI Financial Corp’s US wealth management unit for US$1 billion.

Related funds ADIA BCI Mubadala OMERS
Related tags Private Credit