Cerulli Associates’ Boston team writes that private debt has become an essential complement to private equity. Its rapid and continued growth demonstrates its appeal and value-add as a source of funding for issuers and yield for investors.
Private debt has been one of the fastest-growing private markets strategies, standing at USD1.5 trillion in assets under management (AUM), or just above 10 per cent of the total across all strategies, according to Preqin. A proven asset class across economic cycles, private debt has met and passed the market test during the post-2008 global financial crisis, COVID-19 slowdown, and recent banking-industry-induced volatility, and each time it has grown stronger and expanded at the expense of the more fragile banking institutions, Cerulli writes.
Demand for private debt continues to grow—not only from existing corporate borrowers at every stage of corporate development, but also from new industries such as infrastructure, real estate, fintech, and life sciences. Geographically, while the US currently is the largest market for private debt, demand is growing in Europe and Asia for flexible debt solutions.
Private debt products have particularly appealed to a wide variety of institutional investors and high-net-worth (HNW) investors. Regular, relatively safe income payments are especially valued by pensions and endowments, which may be exposed to shortfalls and need to make payouts to beneficiaries. Meanwhile, retail investors are actively gaining access to private debt through publicly traded business development companies (BDCs). These vehicles grew to more than USD210 billion in 2022.
Unlike private equity, returns in the form of yields are generally stable (contractually promised) and safer given their seniority, Cerulli says. A growing amount of asset owners will continue to shift their assets toward a fixed-income allocation substitute that is safe and higher returning, while many first-time private market investors are likely to gain access with new retail-investor-friendly products.
At the same time, Cerulli recognises macroeconomic and regulatory risks associated with the asset class. Private debt benefits by including a wide range of substrategies, but it relies heavily on financing M&A and private-equity-sponsored deals and thus is exposed to slowdowns in dealmaking caused by rising interest rates. Additionally, private debt’s growing presence across the economy subjects it to increasing government scrutiny and potential regulation. Although its closed-end fund structure precludes run-on-the-bank types of risk and the Federal Reserve has found it poses no systemic risk, calls for regulating private debt continue.