HPS seeks $600m for distressed mid-market loans – exclusive

The firm, which sees managers making decisions they will later regret, will invest in privately negotiated transactions on already-originated loans.

HPS Investment Partners is sensing trouble in the private credit markets and is looking to capitalise on the opportunity with a $600 million fundraise.

The New York-based firm’s HPS Special Situations Opportunity Fund has closed on $150 million of partner money and one limited partner commitment, and it has completed one transaction, according to a source familiar with the matter.

The debt shop, which declined to comment, is looking to take advantage of dislocations in the illiquid credit markets – rather than the larger, liquid markets – through privately arranged secondary mid-market loan sales.

The strategy comes amid ever-deteriorating underwriting standards and the growth of EBITDA addbacks. Though the larger the company is the worse the documentation tends to be, sources have said that in order to deploy capital they are being forced to take terms they thought they’d never agree to even several years ago.

In a separate move that built out its troubled credit investing group, HPS bought distressed debt manager Tålamod Asset Management, a Dallas-based firm that had raised $100 million-$200 million for its Tålamod Capital Partners flagship fund.

Distressed debt and special situations fundraising have fallen recently – locked-down distressed capital fell from $66.60 billion in 2017 to $23.45 billion last year. That was a decrease from more than 31 percent to about 17 percent of total private debt capital raised in the respective years. Fundraising in the first quarter posted a strong $10.61 billion, though it was buoyed by one large fund: Lone Star Fund XI’s $8.2 billion raise.

HPS is also in market with the latest vintage of its junior debt fund, HPS Mezzanine Partners 2019, for which it has raised more than $5 billion toward its $8 billion target since the firm began raising it earlier this year, the source said. If HPS meets its target, the vehicle would be one of the largest mezzanine funds ever.

HPS oversees $47 billion in assets, with $30 billion residing in private credit funds and $17 billion in public credit vehicles. Private credit strategies consist of direct lending, mezzanine debt, real estate, European asset-based lending and energy and power. Public credit strategies consist of European and North American corporate credit, collateralised loan obligations, securitised credit and Asia long/short credit.