Investment Funds: Slower Fundraising Poses Risks to Feeder Funds

Private capital fundraising remains challenging, leading to additional risks to investment fund debt ratings, particularly feeder fund debt. Feeder funds are generally used as a fundraising vehicle, bringing capital into funds by issuing delayed draw debt along with calling in equity commitments to funds. The challenging fundraising environment poses the following risks to feeder fund debt: (1) managers may not be able to meet fundraising targets, resulting in less-diversified portfolios; (2) the longer timeline for fundraising increases uncertainty regarding a fund's composition; and (3) as capital continues to flow to larger, well-established managers, new and emerging fund managers may struggle to find the capital they need.

Key Highlights:
-- Private capital fundraising is challenging, with less capital being raised and longer timelines.
-- Morningstar DBRS focuses on private debt funds, which raised only $30 billion across 25 funds in Q1 2024, the weakest fundraising quarter since 2016.
-- Challenges with fundraising pose risks to investment fund debt, particularly feeder fund debt, as the investment pool is still ramping and may not reach the expected composition or diversity level that the manager anticipates. This increases uncertainty in analysis of feeder fund debt.
-- From a credit ratings perspective, this increasing uncertainty is included in our analysis in various ways, including conservative assumptions fund composition, lower credit quality expectations, and an acute focus on manager quality. With the majority of capital going to established managers with track record, manager selectivity is critical.