Dealmaking has had all sorts of challenges throughout 2022 including the rising cost of capital and rising interest rates. In tandem with lower valuations, firms are beginning to see a larger market for credit funds and direct lending. As a result, firms like HighVista Strategies are doubling down on private credit funds.

HighVista Strategies closed its HighVista Opportunistic Private Credit Fund II LP with $450 million in capital. The fund will follow up on its processor fund’s multi-strategy approach.

“Central banks globally are actively reducing liquidity through raising interest rates and quantitative tightening, capital allocation will become more competitive,” says Ben Radinsky, principal at HighVista Strategies. “Banks are tightening covenants, and pulling leverage facilities. That, in turn, limits the capability of non-bank entities to invest – all of this while valuations have declined because of the impact of the increased 10-year yield on long-duration assets. Because we have capital when others do not, we can deploy it more easily. Moreover, we can tighten our covenants and improve our collateral positions, while winning more deals.”

HighVista is concentrating on investing in real estate-backed credits including high-quality assets that require flexible financing; corporate credits including situations with declining revenue that can pledge real assets, high-quality recurring revenue businesses that don’t have the Ebitda for traditional loans and loan-to-own deals, deals in which the lender may obtain an ownership stake from the borrower given certain distress situations; and uncorrelated credit opportunities.

HighVista is not the only firm to spot the value in credit fundraising strategies. Catalio Capital Management, a multi-strategy life sciences investment firm, closed its inaugural special situations fund, Catalio Credit Opportunities Fund I, with over $85 million in commitments. The fund is focused on providing next-gen biomedical technology firms with bespoke debt and structured equity services for unique financing requirements.

“Without taking a stance on the state of inflation and interest rates it is hard to anticipate market changes,” says Radinsky. “If inflation persists and rates go up, many of the credits priced over the last five years will be under water. Valuations have come down and that alone can disrupt the orderly workings of markets as credits cannot be easily refinanced. Bull market credits issued with rosy assumptions, and without sufficient lender protections, could be quite challenged. But, if inflation subsides and rates moderate, the market could respond favorably.”

These firms are identifying areas in the market that are often undercapitalized in comparison to direct lending and traditional capital markets which offer the potential for high returns.

Do you think more firms will see the need for tailor-made financing? Let me know at [email protected]

Cole Lipsky