After a Record-Setting 2021, Private Debt Fundraising Declines in First Half of 2022

Private debt fundraising has stagnated in the first half of 2022 amid an economic backdrop of rising rates, and a slowdown of global growth.



In the first half of 2022, private debt fundraising stagnated, according to recent data from PitchBook Data. The slowdown in the sector comes after 2021 was a record-setting year, peaking at a trailing 12-month high of $228.1 billion in total funds raised. At the end of June 2022, the trailing 12-month figure of total capital raised was narrowly short of the record, at $211.3 billion.

Direct lending remained a prominent strategy in private debt, accounting for more than one-third of capital raised in the first half of 2022. Sub-strategies of credit special situations and real estate debt funds also raised large amounts of capital thus far in 2022.

As valuations draw down in the face of rising interest rates, PitchBook analysts anticipate a resumption in private equity deal growth through the second half of 2022. Total private equity deal flow reached $2.0 trillion across the U.S. and Europe in 2021, before reverting in the first half of 2022. Private equity deals have swelled in total value, due to the growth in the amount of funds and firms operating in the space, and in tandem with growth in private market valuations. In 2021, 40.2% of U.S. private equity deals were completed at an Enterprise Value / EBITDA of greater than 15x.

The economic backdrop of rising rates, and a slowdown of global growth, has a neutralizing effect for private debt funds. The floating-rate nature of many private debt vehicles makes existing loans more lucrative, as coupon rates rise with rate hikes. However, due to the rate hikes, traditional fixed-income investments become more attractive to asset allocators. As real yields rise and real returns, above inflation, are positive, investors will be incentivized to position back into highly liquid and more traditional forms of debt securities, such as corporate and government bonds.

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With the cost of debt rising, private equity firms using the services of private debt funds for financing may lower their use of leverage, potentially reducing overall deal flow. Though debt funds will be able to collect higher rates of interest on what they do lend.

The PitchBook report highlighted that leveraged loans have particularly struggled thus far this year. In the U.S., institutional leveraged loan volume fell 61.9% from Q2 2021 to Q2 2022. Similarly in Europe, leveraged loan volume in the first half of 2021 was €82.8 billion (US$81.15 billion) and diminished to only €28.1 billion (US$27.54 billion) in the first half of 2022. Moreover, the Morningstar LSTA US Leveraged Loan Index was down 4.6% in the first half of 2022, the worst reading for any comparable period since the 2008 global financial crisis.

In conjunction to overall weakness in the leveraged loan market, in Europe, the high-yield bond market generated its lowest total amount of issuances in the first half of a year since the global financial crisis. In the U.S., high-yield issuances were the lowest in a second-quarter dating back to 2005.

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SEC, CFTC Fine 11 Financial Firms Nearly $2 Billion for Recordkeeping Failures

The regulators say the violations impeded their ability to conduct investigations.



The Securities and Exchange Commission and the Commodity Futures Trading Commission, fined 11 of the world’s largest financial firms nearly $2 billion for failing to maintain, preserve, and produce electronic communications and records.

 

The 11 companies, which have acknowledged violating recordkeeping provisions of securities laws, include Bank of America, Barclays, Cantor Fitzgerald, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, Jefferies, Morgan Stanley, Nomura Securities International, and UBS.

 

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According to the regulators, over a span of nearly four years, the firms’ employees routinely communicated business matters via text messages on their personal devices. And regulators said the companies failed to maintain or preserve a large majority of the off-channel communications, which is in violation of the federal securities laws. The violations involved employees at multiple levels of authority, including supervisors and senior executives, the regulators said.

 

The companies agreed to pay the SEC more than $1.1 billion in combined penalties. Barclays, Bank of America, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, Morgan Stanley, and UBS agreed to pay $125 million each. Jefferies and Nomura each agreed to pay $50 million, while Cantor Fitzgerald agreed to pay a $10 million penalty to the SEC.

 

“By failing to maintain and preserve required records relating to their businesses, the firms’ actions likely deprived the Commission of these off-channel communications in various Commission investigations,” said SEC Chair Gary Gensler in a statement.

 

Each of the firms and certain subsidiaries were charged with violating recordkeeping provisions of the Securities Exchange Act of 1934 and with failing to prevent and detect those violations. In addition to the fines, each company was ordered to cease and desist from future violations of the recordkeeping provisions and were censured.

 

The companies also agreed to hire compliance consultants to conduct comprehensive reviews of their policies and procedures relating to retaining electronic communications used on personal devices and addressing non-compliance by employees.

 

“As technology changes, it’s even more important that registrants appropriately conduct their communications about business matters within only official channels, and they must maintain and preserve those communications Gensler said in a statement.

 

Separately, the CFTC settled charges against swap dealer and futures commission merchant affiliates of the 11 firms, which agreed to pay the regulator more than $710 million in penalties combined. 

 

Bank of America agreed to pay the CFTC $100 million, while Barclays, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, Morgan Stanley, and UBS agreed to pay the regulator $75 million each. Nomura agreed to pay $50 million, while Jefferies and Cantor Fitzgerald agreed to pay the CFTC $30 million and $6 million. respectively.

 

Bank of America and Nomura neither admitted nor denied certain specific findings of the CFTC’s Division of the Enforcement’s investigation, according to the CTFC release.

 

“Recordkeeping requirements are key to the Commission’s oversight of registrants and a registrant’s disregard of its obligations threatens the Commission’s ability to effectively and efficiently conduct examinations and investigations,” Acting Director of Enforcement Gretchen Lowe said in a statement. “Registrants and other market participants subject to the federal commodities laws and regulations are encouraged to examine their own internal controls and supervision to ensure they are in compliance.”

 

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