HPS Investment Partners Limits Inflows to $10B Fund Amid High Demand

Key Takeaway

• HPS Investment Partners limits inflows to its $10 billion HLEND fund due to high demand, capping JPMorgan's contributions at $150-$200 million monthly.
• The private credit market faces intense competition, with managers offering larger checks and favorable terms; recent deals include a $2.65 billion facility for Squarespace Inc.
• Banks like Goldman Sachs target risky PIK debt as a cheaper alternative to private credit, with Fedrigoni SpA issuing €300 million of PIK toggle notes at lower costs.

HPS Limits Fund Inflows

HPS Investment Partners has decided to limit inflows into its $10 billion HPS Corporate Lending Fund (HLEND) due to a surge in demand for private credit. This move is aimed at managing the scarcity of investment opportunities in the $1.7 trillion private credit market. According to sources familiar with the matter, the cap will reduce contributions from its main distributor, JPMorgan Chase & Co., and investors who are turned down will be placed on a waitlist.

Starting in March, JPMorgan reduced its HLEND contributions to around $150 million to $200 million per month, down from a previous range of $200 million to $500 million. The cap is expected to help HLEND avoid deploying extra cash into lower-yielding investments like liquid loans, which had an average yield of 319 basis points more than relevant benchmarks last week. In contrast, one of the cheapest private credit loans recently offered had a spread of 450 basis points.

The backlog of investors at JPMorgan, which accounts for about 90% of HLEND's distributions, has grown to around $400 million to $500 million. This backlog will fluctuate based on investment activity and interest. Spokespeople for HPS and JPMorgan declined to comment on the matter.

Competitive Private Credit Market

The private credit market is seeing intense competition, with managers pressured to cut larger checks or offer more favorable terms to win deals. For instance, three private credit lenders recently provided a $2.65 billion credit facility for the buyout of website builder Squarespace Inc. Additionally, KKR & Co.’s Depot Connect International received a direct loan at 99.75 cents on the dollar, one of the smallest issue discounts ever in private credit.

As a business development company (BDC), HLEND raises funds mostly from individuals rather than institutions. Unlike other private credit funds, BDCs receive cash quickly upon investor commitment, whereas draw-down funds can have commitments for years without calling in any cash. This structure allows HLEND to call in cash from waitlist members as needed for deals or other purposes.

Some private lending firms have opted to cut fees to boost returns in a tough investment market. For example, Oaktree Capital Management recently lowered the base management fee on Oaktree Specialty Lending Corp. to 1% of gross assets from 1.5%, following an increase in problem loans and disappointing earnings. HPS charges 1.25% of net assets in fees for HLEND.

Banks Target Private Credit

Investment banks, including Goldman Sachs Group Inc., are targeting some of the riskiest types of private credit, such as payment-in-kind (PIK) debt, to reclaim business from direct lenders. PIK bonds allow companies to defer interest payments until the bond's maturity, often at a higher interest rate if payments are deferred.

Banks are now pitching PIK toggle bonds, which give borrowers the option to delay interest payments, as a cheaper alternative to private credit. For example, Italian packaging firm Fedrigoni SpA recently sold €300 million of PIK toggle notes at a lower cost than typical private credit alternatives. The CCC-rated note priced with a cash coupon of 10% or 10.75% if interest payments are deferred, less than the 12% generally charged by direct lenders.

The resurgence of PIK bonds in 2024's market, where risk premiums remain tight but higher interest rates have dampened overall issuance, gives banks a way to maintain private equity business while M&A activity remains muted. However, investors run the risk of missing out on cash payments and ending up with a riskier borrower that may struggle with mounting debts.