HPS Investments has raised $9bn for one of the largest-ever funds to supply riskier corporate loans, as struggling companies increasingly turn to private investment groups for debt.

The US specialist debt investment group, which manages $65bn in assets, has completed fundraising for its latest “mezzanine” debt fund, a term for higher-risk corporate loans that typically rank behind those that banks provide, according to a statement seen by the Financial Times.

Its closure is the latest sign of how large investment funds can still draw strong demand to offer debt to companies, even as the spread of coronavirus has driven a record wave of US bankruptcies.

The New York-based company began raising the mezzanine debt fund in April 2019 with a target size of $8bn and has already invested about half of its capital, according to the statement.

While the fund closed with about $9bn of commitments from investors, its total firepower will exceed $11bn, due in part to its use of a borrowing facility — a common practice among private equity and debt investors.

Medium-sized businesses have for years raised debt from so-called “direct lenders” such as HPS, but a recent rush of inflows from deep-pocketed investors like Middle Eastern sovereign wealth funds has given some funds the ability to lend to larger companies.

HPS has emerged as one of a handful that can single-handedly underwrite loans as large as $1bn. While many of these direct lenders are part of larger private equity groups, such as Apollo or Blackstone, HPS is an independent group that spun out of JPMorgan’s hedge fund unit Highbridge in 2016.

HPS notably led a $1bn loan deal for Canada’s Bombardier in July, plugging a potential funding gap for the aircraft maker as it awaited regulatory approval to sell its €7.5bn train division.

While this debt was secured on some of Bombardier’s assets, the higher-than-typical interest rate meant HPS’s mezzanine fund provided some of the financing, according to people familiar with the matter. The investment vehicle also helped fund last year’s buyout of Montreal-based security group GardaWorld, which last week began a £3bn hostile takeover of UK rival G4S.

Apollo in July unveiled a new direct lending partnership with Abu Dhabi sovereign wealth fund Mubadala, with the aim to deploy $12bn in just three years. Blackstone’s GSO Capital began fundraising on its own new mezzanine debt fund earlier this year, which public filings show has a target size of $7.5bn.

HPS’s mezzanine fund is also able to provide so-called preferred equity, which ranks ahead of common stock and can pay larger annual distributions to holders. The investment firm provided $600m of such financing to Canadian waste management GFL Environmental in August, while also taking part in a $1.75bn preferred equity deal for US grocer Albertsons in May.

Source: Financial Times

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