By Andrew Hedlund

NEW YORK (LPC) – Goldman Sachs Merchant Banking Division (MBD) is seeking up to $17 billion for private credit investments for senior debt financings and special situations transactions, according to documents from Connecticut’s state pension plan.

Consisting of total investor commitments and anticipated leverage, MBD is targeting US$7bn for Broad Street Loan Partners IV (Loan Partners IV), according to the documents. The fund will participate in senior loan deals in the upper middle market and smaller deals in the broadly syndicated loan market.

A Goldman Sachs spokesperson declined to comment.

The Goldman unit is also seeking between US$5bn and US$10bn for West Street Strategic Solutions I (WSSS I), a special situations fund that will invest in transactions that include growth capital and balance sheet restructurings.

Loan Partners IV has raised approximately US$1bn from investors, excluding leverage, while WSSS I has raised approximately US$6.4bn, according to US Securities and Exchange Commission regulatory filings.

“We accelerated the marketing of a new credit fund called West Street Strategic Solutions as a part of our transition to fund-driven investing. Client receptivity has been very strong,” David Solomon, the firm’s chief executive officer, said on the bank’s second-quarter earnings call. “We believe this strategy is well-timed to capture opportunities in the market today and provide critical private financing to companies in need.”

MBD’s fundraise comes at a competitive time in the private credit market, with 486 funds in the market this month, the most in the past five-and-a-half years, according to data from research firm Preqin. Almost 300 of those vehicles are raising capital for direct lending, most often associated with senior debt, and special situations, according to the data.

Fund managers investing in direct lending and special situations are targeting more than US$124bn of the US$239bn being raised across private credit funds globally, as of July 2020, according to Preqin.

Concurrently, lending to private equity-backed companies in the middle market, the most common type of private credit transaction, fell as much as 70% in the second quarter, according to Refinitiv LPC data.

Limited partners (LPs) such as university endowments, insurance companies and pension funds invest in private credit funds.

The Connecticut pension fund is considering a US$350m commitment to Goldman Sachs’ investment funds to manage across different credit strategies, including Loan Partners IV and WSSS I.

The pension fund portfolio has a 5% allocation to private credit, Shawn Wooden, Connecticut state treasurer, said in an email.

“The purpose of this allocation is to generate attractive, risk-adjusted returns above public market debt strategies and reduce volatility through lower correlation to other asset classes,” he said.

The private credit allocation can include sub-strategies that invest in senior debt, junior debt, distressed debt and special situations, Wooden said.

After several months of caution following the Covid-19 outbreak, LPs have broadly resumed normal operations, according to a June investor survey from Campbell Lutyens, a firm that helps credit managers raise money.

Loan Partners IV will operate with fund-level leverage, which would allow Goldman Sachs to borrow money to invest alongside LPs’ commitments.

The two funds will mainly invest in North America-based companies. After paying investors’ fees, target returns for Loan Partners IV will be 10% and 12%-14% for WSSS I.

“Credit markets have been volatile during the beginning of 2020, and the coronavirus pandemic has the potential to undermine corporate fundamentals for some time,” Wade O’Brien, a managing director at investment and advisory firm Cambridge Associates, said in an email. “Attractive opportunities remain in credit, but investors may need a different playbook than the one developed during the last financial crisis.”

(Reporting by Andrew Hedlund; Editing by Michelle Sierra, Kristen Haunss and Paula Schaap)