Thoughts on Diameter entering direct lending market?
Interested in hearing folks thoughts on Diameter entering the direct lending market. Seems as though it is a natural adjacency in their strategy and direct lending is low vol solution to increasing AUM. Seeing private equity firms (ex. Stone Point, Charlesbank, L Catterton, etc.) expanding into private credit in addition to credit HFs (Silver Point, Goldentree, Oak Hill, etc.)
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Large platforms (PIMCO, CLOs, insurance companies) working out stuff in house was already happening regardless of whether someone like Silver Point decided to raise a special sits lending fund that's a drop in the ocean of private credit.
There is however, a pretty big difference between the universe of distressed credits and the universe of distressed credits that end up restructuring in any given year. Chances are, if you're a fund that can only make money with non-pro rata uptiers and DIPs, you're too big and have been doing single digit returns for a number of years now.
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Agree 100%. Net negative for distressed opportunity set in future
It’s a non-factor for the market. How much do you think they can raise in the next 5 years? $10b? That’s what they’ve raised in the last 5 years in their HF product which is best in class. BX raises $10B in direct lending every 6 months, in one fund. I have a hard time seeing why Diameter would be a premier choice in direct lending given the founders’ backgrounds are in HY trading and public distressed. Unless they bring in a blockbuster outside partner hire.
From a employment perspective, I’d be concerned on why they are getting into DL now which is not a core competency and is an oversupplied “me-too” market. Every cat and dog has a DL fund these days - returns and fees only go one way when this happens in any asset class. It seems to me like a FOMO driven AUM grab. It will surely benefit the GP economics and valuation, but if you’re not a equity partner, this is probably a dilutive move. You need a large fixed cost infrastructure with a full sourcing/ops/valuations/deal team staffing to be a real player in the DL space. That just means the HF carry will be redirected to standing up that org until it scales.
This was a unique success story in the credit HF space that set a good example of how to run a credit strat in the post-GFC era. Sad to see that the siren song of AUM gathering was too strong. This feels like the initial steps (along with CLO buildout) to eventually become another large diversified credit asset manager like what happened to Brigade/Anchorage/Benefit St over time. Common characteristic is that they were all once hyper-focused HFs with differentiated performance at first. No doubt logical move for the GPs but their HF returns are probably at risk as the founders become more of a manager/businessman than investors.
In speaking to a friend who works over there I'm not sure how accurate this is. Their hedge fund has been closed and purposefully size constrained - could be much larger if they wanted. The Apollo money is targeted to build out europe office for the hedge fund and fund the private credit build out where they have hired a very senior team from bx and ares in order to avoid the exact issue you are talking about. It will be interesting to see if they can avoid the pitfalls of some of the funds you mentioned that have come before them. One would think they learned some lessons watching the collapse of Anchorage.
“Spoke to a friend” …. “to build OUR Europe office”
thanks for the pr spin diameter guy
I don't work at Diameter so I have no unique insight, but there is a big difference between AUM gathering via CLO/real estate and a traditional secondaries fund raising a private vehicle for special sits lending.
There is a big distressed opportunity set now, but you have to remember we just got past a decade where the DKs and Silver Points of the world barfed up negative returns every other year, guys got destroyed in illiquid energy, meanwhile sub $1bn funds that were comfortable doing all privates gave you mid teens IRRs.
Everyone and their mother has one of these private funds because you're leaving free money on the table if people show you stuff based on your reputation / connections and you pass just because you don't have a privates guy. There was another thread that discussed this when Viking Global and Sycamore were in the market for juniors for new distressed teams. They are far from the only large alt managers that now have some ex Blue Mountain / Fir Tree guy talking to LPs about how their "institutional knowledge" and "reputation as equities / performing lender" gives them so much advantage sourcing special sits lending ops over traditional distressed funds.
Edit: nvm, the press release said they launched CLOs in 2021, yeah they're asset gathering
"Edit: nvm, the press release said they launched CLOs in 2021, yeah they're asset gathering"
lol
do people have the diameter hf returns out of interest?
I see it as a natural extension of their platform, albeit brand dilutive to the thoroughbred HF crowd, yet accretive to the operators of the business. They preach a hybrid trading/research model and the credit broadly syndicated paper DD lends it well to the MM flow. Not sure how they cope from a sourcing perspective, given that they prob source trades from bankers. Structuring & sizes? Not really worried about that. They have drawdown vehicles.
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