HPS amasses $21bn private credit fund as it plots expansion

HPS Investment Partners has raised one of the largest private credit funds on record, confirming its spot as one of the leaders in the industry as the firm debates a possible public listing or merger.

HPS amassed $21.1bn for its flagship Specialty Loan Fund VI, its largest fundraising since the firm was founded in 2007. The mammoth fund received $14.3bn of commitments from investors, one of the largest sums ever raised by a traditional direct lending fund, according to data provider Preqin. The $21.1bn figure also includes billions of dollars of bank loans, which increase its ability to invest.

The fundraising, following on the heels of a series of large hauls last year, comes as leaders at HPS consider options that could see the firm go public or merge with a rival private investment group, according to people briefed on the matter. The firm manages $114bn, more than double its size from the start of 2020.

“Performance attracts capital,” Michael Patterson, a governing partner of HPS, said in an interview. “You then have to put that capital to work [while] maintaining that performance. This is a big, very public demonstration that’s what is happening at HPS.”

The firm and several of its rivals have over the past four years become some of the most important players on Wall Street, lending to a growing list of blue-chip companies, buying loan books that banks are keen to shed and taking on risks that traditional lenders have retreated from.

Their ascension has been driven by strong performance and a fundraising prowess that has helped the industry accumulate hundreds of billions of dollars in recent years, boosting managers such as Ares, Apollo, KKR, Blackstone and Sixth Street. Many have become go-to portfolio managers for insurance companies — including insurers they own themselves — replacing traditional corporate bond and loan investors.

Patterson said HPS saw “significant” areas to grow the company’s business, including in the fast-growing area of private investment-grade and asset-backed debt. The areas have been a focus for competitors who are now financing aircraft leases, music royalty streams and even semiconductor manufacturing plants.

HPS was formed in 2007 by Scott Kapnick, Scot French and Patterson, before the financial crisis and resulting regulation prompted many banks to scale back the types of lending they were doing. All three had worked at Goldman Sachs during their careers before starting the firm, which they built within JPMorgan Chase’s asset management business.

But as post-crisis regulation bit and JPMorgan’s commitment to the unit wavered, they moved to exit the bank. Top executives ultimately bought the business in 2016, separating HPS from JPMorgan with new investors Dyal Capital and Guardian Life purchasing stakes in the firm.

The firm is now debating its next steps. It has filed documents with securities regulators in preparation for a potential initial public offering, according to people briefed on the matter. A listing would allow HPS to reward senior staff or pay for the acquisition of a rival. The firm could also merge with a rival private investment group looking to bolster its private credit bona fides. Insiders caution that no decision has been made and HPS could remain independent. HPS declined to comment on its business plans.

The new Speciality Loan Fund VI lends to relatively risky companies in need of capital, and the fund often steps in ahead of restructurings or difficult refinancings. The typical loan the fund offers carries an interest rate 7 percentage points above Sofr, the floating interest rate benchmark. That can yield between 12 per cent and 13 per cent today.

HPS last year provided a €1.5bn loan to finance the buyout of packaging maker Constantia by One Rock Capital as well as an $800mn loan to medical device manufacturer Tecomet.