As we approach the end of the second quarter, look forward to the FFA’s 6th Annual European Funding Symposium next week in London and keep a close eye on the macroeconomic environment, we thought it would be useful to provide an update on market activity in 2022 based on our observations.
Fund raising. Early indications are that year-to-date private market dollars are on track with last year’s record pace, while the number of funds could end the year down significantly. Larger platforms continue to attract a larger share of capital but, overall, capital-raised totals close to last year’s record numbers mean there are plenty of opportunities for lenders.
New business. Reflecting the fundraising trend, our overall US deal count is slightly lower while dollar issuance is in line with the record pace of 2021. Average deal size is up, corresponding to largest funds in the market. In fact, we have closed or are currently working on 11 multi-billion dollar syndicated facilities. If this trend continues, it will set a record and crush the 2021 mega-deal rebound after a slower 2020 due to the COVID environment. In the UK, our new deals business was up 14%. Among lenders, this is a multi-speed market as capital constraints, staffing capacity and business mandates have evolved differently over the past two years.
Hours. While new deals correspond to new creations, our time accumulations are a better measure of overall market activity since the statistic captures transaction events such as changes, joins, and investor closes. Year-to-date, our time accumulations in the US are ahead of 19% over last year and in the UK 30% ahead of the prior year, indicating significant overall market growth . To support this growth, we have increased our ranks from 19 lawyers and paralegals year-to-date to a total of 75 for our global fundraising practice. This growth also excludes lawyers and paralegals who will start this summer and a solid promotion of 8 new lawyers in the fall, our largest promotion ever for fundraising. Market growth continues to create opportunities for many young professionals in our industry, a fact we should all be proud of as we continue to invest in developing the next generation.
Margins. As we anticipated earlier, making clear observations about margins has become more complicated by variations in approaches to adjusting credit spreads on SOFR loans. In our view, the simple conclusion on pricing is that lenders have retained their pricing power in 2022. Average underwriting facility margins are a few basis points higher than in 2021, but may be influenced by loans that incorporate which would have been a credit spread adjustment. in the margin.
ESG. We have seen the flow of deals on the ESG side this year, and it remains strong with 6 deals closed so far this year. That’s on track to top 2021’s deal count by a slight margin despite regulatory headwinds. As fundraising slows, ESG funds have not been immune, with this quarter bringing some of the first reported declines in ESG investor momentum in the past two years. That said, ESG-focused funds aren’t going anywhere and we should expect this segment of the market to continue to evolve.
Outlook. The market environment has fundamentally changed over the past six months, but we do not expect a material impact on funding origination volume for the remainder of 2022 due to the current momentum in fundraising and the fact that underwriting credit risk is not as directly tied to economic variables as many other commercial loan asset classes.
For the 2023 outlook, private capital market internals are worth watching. The value of buyout fund transactions and outflows both appear to have slowed significantly. Two observations on this: (1) A deceleration in the velocity of capital may present a headwind to fundraising in 2023, as capital deployment and the return of capital to LPs are both slow, and (2 ) LPs are required to be more selective in strategy and sponsor allocations given the more complex risk and reward environment, which could also slow fundraising in 2023.
On the lender side, slowing economic growth may lead to a more intense focus on costs, especially among large lenders. As bank revenue growth becomes harder to generate in a slowing economy, controlling expenses comes to the fore as a tool in the defense of profitability. A positive perspective on this may be that the motivation to innovate in the financing of funds increases. If slow inflation is the base case for the next 12 months, we expect lenders to spend more time on questions such as: what is our overall acquisition cost per million dollars of loan exposure and what is the long-term goal? Where can customer interactions be migrated to a digital self-service platform? Where can automation or process improvements be deployed to shift the focus of team members to relationship or consulting roles? Necessity, again, may prove to be the mother of invention as lenders and borrowers together find more efficient and streamlined approaches.
Good luck closing the quarter and enjoying your weekend. I look forward to seeing many of you in London. It will be so good to be back!