Fidelity International (Fidelity) is abandoning its direct lending ambitions after just one year. This involves financial investors directly providing loans to companies, primarily owned by private equity. As confirmed by a company spokesperson, the financial services company has halted its European activities. Bloomberg was first to report on the matter.

According to the spokesperson, the business was still in the development phase. The asset manager had only started fundraising for its direct lending debut fund last year. It was rumoured in financial circles that the target volume was 600 million euros. To build the direct lending business in Germany, Nadine Henker was recruited from the financial services provider LGT as of June 1, 2023. Direct lending was supposed to become another pillar in private market activities, where the asset manager is already active in real estate.

Fidelity will continue with its existing 2.4 billion dollar real estate business established in 2006. They will also continue their business with collateralised loan obligations (CLOs), which are asset-backed securities issued by a special purpose vehicle, and play a significant role in financing private equity deals (leveraged finance). CLOs are one of the main investor groups to which banks syndicate leveraged loans that they originate. In 2021, Fidelity launched its first CLO, and now manages around 2 billion dollars in this business segment, according to their own statements.

Fidelity will not abandon direct lending altogether, but rather its own direct lending unit. „In the future, we will collaborate with external partners to meet the needs of our clients in this area – unfortunately, some functions will be affected by this decision“, the statement says.

According to Bloomberg, Fidelity has dismissed some members of the 70-person private markets team. Fidelity refrained from providing a comment on this. However, anyone connecting the dots would swiftly identify the 20-strong direct lending team, under the leadership of Raphael Charon, based in London. Charon was recruited by Fidelity from the Bank of Ireland about two years ago to create the necessary structures for a direct lending business. Nadine Henker is also (or was) part of this team.

According to Bloomberg, the decision to retreat was made after Fidelity's Co-Investment Chief Andrew McCaffery resigned. McCaffery was responsible for fixed income, multi-assets, and private assets and is said to have supported the direct lending strategy. A similar situation occurred previously at the Dutch asset manager Robeco, which manages 180.6 billion dollars in assets.

Robeco also experienced a change in the central Chief Investment Officer position, followed by a halt to direct lending. Like Fidelity, Robeco was in the process of raising funds for a European private debt fund. The target volume was reportedly even larger than Fidelity's, ranging from 1 to 1.5 billion dollars.

Both Robeco and Fidelity officially attributed their withdrawal from private debt to market developments. Robeco referred to „customer feedback" and a „thorough analysis of market conditions". Fidelity cited the "maturity of the market“ and "scale effects necessary for long-term success“ as reasons for the strategic retreat.

Both asset managers usually originate from the liquid side of the capital market. The decision to delve deeper into the private debt market likely occurred around 2021. That year was the absolute record year after the pandemic year 2020 – both for private debt and private equity. At the same time, the returns on liquid capital market products were under significant pressure due to years of zero interest rate policies.

Since then, the conditions for private debt have changed dramatically. Following the outbreak of war in Ukraine, inflation increases, and the subsequent interest rate hikes, activity in the M&A market, which is crucial for the direct lending business, has plummeted. Simultaneously, it has become possible to earn more money with liquid capital market products, such as bonds.

This development is also reflected in fundraising. According to data provider PitchBook, a total of 491 private debt funds worldwide raised 302.1 billion dollars in the record year 2021. By the end of 2023, fundraising volume had decreased by more than a third to 197.5 billion dollars. In the first quarter of this year, only 25 funds raised a total of 30.4 billion dollars. The share of mega funds with volumes between 1 and 5 billion dollars rose to over 90%.

In the current market environment, fresh funds are flowing almost exclusively to large funds. At the same time, the barriers to entry for newcomers are higher than ever. In the record-breaking year, 77 new debt funds debuted worldwide and raised a total of 12.4 billion euros, as per PitchBook. A year later, only 43 funds made it to the market, and last year only 30. In the first quarter of this year, not a single newcomer managed to raise funds.