Big hedge funds are pushing into private credit as they seek to establish themselves as diversified financial institutions, with Millennium Management, Point72 and Third Point all looking to launch new funds and strategies.
Third Point, a $20bn firm with a history as an activist investor, plans to launch a publicly traded private credit fund next month called Third Point Private Capital Partners, which will lend directly to businesses.
Millennium, which manages more than $75bn in assets, has been weighing whether to launch a separate fund to invest in less liquid assets, including private credit, its first new fund in more than three decades.
Steve Cohen’s Point72 earlier this year hired Todd Hirsch, formerly a senior managing director at Blackstone, to lead its private credit strategy. He has also recruited Alex Greeley from Linden Partners, Jay Ditmarsch from Carlyle and Rudder Zhang from Brookfield Asset Management.
“Hedge funds are in the asset gathering business,” said one leading banker to hedge funds. “The boom in private credit has really attracted their attention.”
Millennium, Point72 and Third Point declined to comment.
Private credit — or non-bank lending that encompasses everything from risky corporate loans to debts tied to music royalties — has become a huge growth area as asset managers displace banks as lenders.
Millennium, Point72 and Third Point — among the world’s largest and oldest hedge funds — have typically specialised in trading so-called liquid securities, such as equities, fixed income and commodities, that they can move in and out of quickly.
But private credit offers a way for them to target higher returns, access longer-term capital and cement their positions as more than just hedge funds, attracting potentially richer valuations for their businesses.
“If you’re the founder of a hedge fund and hitting that retirement succession phase, if you’re going to cash out, how am I going to get the best multiple?” the banker said.
Their investors, such as pension funds, endowments and sovereign wealth funds, were also increasingly looking for a “one-stop shop”, they added.
Third Point’s founder Dan Loeb said in April that he had looked on as the enterprise values of alternative asset managers such as Brookfield and Apollo soared, and that moving into private credit was one way to seek to compete with their pace of growth.
“We’ve always been involved in credit . . . [but] I wanted access to opportunities in the credit world that I wasn’t getting through public high-yield and structured debt,” he said. “And I realised I had to elbow my way into the party in the private credit world.”
Third Point has brought on a team of investors from Madison Capital Partners and Credit Suisse to lead the effort, according to an investor document seen by the Financial Times. It expects to make the majority of its loans to private equity firms and their portfolio companies, according to the document, even at a time when leveraged buyouts have largely stalled.
Loeb himself was committing more than $100mn to the publicly traded fund, according to two people familiar with the strategy. The hedge fund plans to focus on parts of the market that are not already dominated by bigger players, such as lending to mid-sized companies, added one of the people.
Cohen of Point72 said earlier this year that he wanted to expand into private credit in part because his firm was “more than just a hedge fund”. “Why define myself as just a hedge fund . . . I can do more than that,” he said.
Yet the hedge funds that embraced private credit years ago still have modestly sized strategies in comparison with their broader firm’s investments.
Multi-strategy firm DE Shaw, which first raised a private credit-focused fund more than a decade ago, remains a relatively small player. Its latest funds have drawn in about $1bn from investors, and the hedge fund currently has about $5bn devoted to the strategy, according to two people familiar with the matter. This is a small fraction of the firm’s overall $65bn in assets under management.
There is already intense competition between established private credit players, including Apollo Global Management, Ares Management and Blackstone, to find deals and fundraise the billions of dollars they need to remain competitive.
“You can’t just raise some capital and say, hey we’re open for business,” said one executive at a private credit firm.
“Across the board, hedge funds or otherwise, you’re going to see that some of these newer entrants, or what I might call tourists, aren’t going to be able to generate the same types of returns as the more established platforms.”
Mainstream assets managers such as BlackRock, Franklin Templeton and T Rowe Price have also jumped into the space through multibillion-dollar acquisitions. Rating agency Moody’s projects the asset class could grow to $3tn by 2028.
Advisers warned that hedge fund forays into private credit were not straightforward.
“What happens is these managers get bored with their main business, and then they want to do different things,” said one adviser. “But it’s wishful thinking on their part to think they can become like a Blue Owl or an Apollo or Cerberus.”
