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Goldman Sachs’ former head of investment banking is staring down perhaps the biggest deal of his life.
Scott Kapnick, the chief executive of HPS Investment Partners, is closing in on a transformational transaction for the private credit firm he founded less than two decades ago at a potential valuation of $10bn or more, according to people briefed on the matter.
The press averse 65-year-old was last week courting top Middle Eastern sovereign wealth funds in New York, as he and his lieutenants debated their future. Ahead of him were three paths: the first, the sale of a stake in HPS to one of those investors of $1bn or more; the second, an initial public offering.
But it is the third track that could be the most lucrative for HPS’s founders and the one Kapnick is keen to clinch: an outright sale, possibly to the biggest asset manager of them all, BlackRock.
In the past five years HPS has gone from the periphery of Wall Street to a dominant player. As traditional banks retreated from one of their core lending businesses, HPS filled the void, writing loans to risky companies. Its success has been validated by the mountain of capital it has attracted: the firm managed nearly $120bn as of June.
More importantly, HPS and its rivals are seen as an answer to the problem many asset managers are struggling with: how to secure a toehold in private credit. It is a nearly $2tn asset class that credit rating agency Moody’s estimates could swell to nearly $3tn by 2028.
“If you’re caught in a tidal wave, your boat will go faster,” one HPS adviser said. “If you were small and important before you are bigger and important today and all you had to do was show up to work.”
This article is based on interviews with current and former executives at the New York-based firm, as well as its advisers, competitors and potential investors, including people who know and work closely with HPS. HPS declined to comment.
Private credit has become the driving force in the private investment world, as traditional heavyweights in the industry grapple with ageing buyout funds and investors who are reluctant to commit to new private equity vehicles.
But at the same time, their credit funds have drawn in hundreds of billions of dollars of capital, with insurers and pensions clamouring for the higher yielding investments.
Private credit funds took off in the wake of the financial crisis, after new regulation constrained banks’ lending.
Kapnick got in early. While still at Goldman, he spotted an opportunity to build out a franchise that Goldman’s asset management arm was already dominant in: investing in risky, junior debt.
In 2007, he decamped to the JPMorgan Chase hedge fund division Highbridge Capital Management to launch the strategy there. The unit, called Highbridge Principal Strategies or HPS, became a major player in so-called mezzanine debt.
But as increased regulation stifled JPMorgan’s appetite for making risky loans, the bank’s willingness to invest in the unit cooled. In 2016, HPS’s founders used $300mn of debt to buy the firm. The deal valued HPS at $1bn, according to a person with knowledge of the matter.
“The world was very different then,” one banker who knows HPS well said. “Scott was buying mezzanine [debt] and growing through a big fund and that didn’t agree with JPMorgan.”
Now HPS finds itself as one of the most sought-after assets in private markets.
The boom in private credit has sparked a flurry of dealmaking, as mainstream asset managers such as Franklin Templeton and T Rowe Price look to offset pressure in their traditional mutual fund businesses. Prominent alternatives players such as Brookfield are similarly expanding.
That has left just a handful of large independent private credit players, including HPS, Sixth Street and Golub Capital.
“There’s slim pickings these days and this is a big whale,” one private credit executive who sold their business said.
Kapnick and his colleagues Scot French and Michael Patterson have been preparing for this moment for years.
They have had a coterie of the biggest banks on Wall Street — including JPMorgan and Goldman — working on an initial public offering for more than two years, telling investors as recently as September they were days away from launching the IPO. And they had previously explored a possible merger of equals with private equity giant CVC.
A person familiar with HPS’s senior executives’ thinking said the trio believed they had “a lot of options, [but] have yet” to pick one.
But many of these talks have been used to help draw out a bigger fish: BlackRock.
One person familiar with the process said the discussions to sell a minority stake to Middle Eastern sovereign wealth funds, including Abu Dhabi’s Lunate, and the IPO were happening to “create tension” with a would-be buyer of the entire firm.
Although the three founders had previously sold minority stakes in the firm to Dyal Capital and insurer Guardian Life, an outright sale would provide a windfall for Kapnick and his team. While they are already billionaires on paper, a sale would give them an opportunity to cash out.
“They have kept the upside very much to themselves,” one person who worked with Kapnick for years said.
A person familiar with the firm said the founders had not launched the IPO and sales processes to cash out, and had not taken money out when HPS sold minority stakes in itself before. Instead, the intention was to “further strengthen [HPS’s] position” in the industry.
While BlackRock has been the main focus for HPS, there is also interest in enticing JPMorgan, its former owner, according to one person familiar with the matter.
Alternatives is a key growth area for JPMorgan’s asset management arm, and it is at a disadvantage to Goldman and Morgan Stanley — both of which have large private credit funds.
JPMorgan executives see a deal as one way to catch up, and earlier this year the firm’s asset management arm held talks with $19.5bn private credit manager Monroe Capital over a possible acquisition. But the talks fell apart when more senior JPMorgan executives intervened.
As one person put it, Monroe would not meaningfully move the needle. HPS, by contrast, could.
Kapnick is still close to JPMorgan chief executive Jamie Dimon, according to a friend of the two men. But Dimon ruled out buying a private capital company at the bank’s investor day earlier this year — although he quickly backtracked and said he would be open to a deal if his executives brought him one that made sense.
“If they came in and said, we’ve got a great thing that makes sense for us. Then, yeah, fine, we should do it,” Dimon said.
JPMorgan declined to comment.
The round of talks currently taking place with potential suitors could still fall apart, which is why the IPO process has progressed quite so far. Bankers have told investors that HPS could restart the IPO process after the US election in November.
“They recognise . . . that waiting around for a sale that potentially doesn’t ever happen ultimately is not in their best interests,” one person briefed on the matter said.
People familiar with the matter said that in recent weeks, HPS and BlackRock had discussed the terms of a potential deal, which could include using BlackRock stock to fund part of the purchase price.
BlackRock said it did not comment on “market rumours”.
BlackRock, which has an $85bn private credit business, has been playing catch-up in alternative assets. Larry Fink, its chief executive, has publicly targeted alternatives as a key growth driver. Earlier this month, BlackRock completed its $12.5bn acquisition of infrastructure investment firm Global Infrastructure Partners.
The asset manager is racing to bulk up at a time when valuations for even small private credit firms have surged. But HPS has “a lot of growth in front of them,” one investor in private investment firms said.
“It is like every good company that has options: do you want all the cash now or do you want to ride it through the IPO?”
Additional reporting by Harriet Agnew, James Fontanella-Khan and Brooke Masters