The private debt industry has more than tripled in size since 2006, with assets under management (AUM) increasing from USD152bn to USD465bn as of June 2014. Ryan Flanders, Executive Editor of the newly released 2015 Preqin Global Private Debt Report, examines the growth of the asset class.
The global private debt market, also referred to as the alternative or non-bank lending industry, is fast approaching USD500bn in AUM. The industry has seen steady growth over recent years, spurred on by the growing opportunity of providing private companies with debt financing in the face of bank regulation. One of the most significant gains was made through 2013, when AUM leapt up 16% in the space of a year.
A lot of this growth has stemmed from the development of alternative lending across Europe, a market that has traditionally been dwarfed by the North American private debt industry. Europe-focused private debt fundraising in 2014 accounted for 31% of capital raised globally, up from 23% of capital raised in 2013. Collectively, these funds raised USD19.6bn in capital last year, up from USD18.2bn the year before.
Direct lending has become the most favoured private debt fund strategy, having already increased fourfold over the past three years (USD7.1bn raised in 2012 compared to USD29.1bn raised in 2014). Yet this has the scope for increasing much further – 62% of investors named direct lending funds as presenting the best investment opportunities in the current market. In contrast, the amount of capital raised by mezzanine funds globally in 2014 (USD8.6bn) was less than half the amount of capital raised by these funds in 2013. This is potentially due to these managers being under pressure from the growth of unitranche direct lending funds.
Buoyed by satisfaction with positive returns they have experienced, 57% of investors surveyed by Preqin in February intend to increase their allocation to private debt in the next 12 months, with 65% looking to increase their allocation over the longer term, indicating a bright future for the asset class. Furthermore, the private debt industry currently has USD154bn in committed capital ready to be invested, or dry powder, up from USD139bn at the end of last year. Almost a third (USD50.6bn) of this capital is for direct lending opportunities. With growing investor appetite for the asset class and a rapidly increasing universe of managers offering private debt investment opportunities, growth looks set to continue.
Private debt presents a unique opportunity for investors given the current low yielding environment for traditional fixed income. The development of markets such as Europe and strategies such as direct lending provides numerous opportunities for investors to build dedicated and diverse allocations to the asset class. While it is predominantly large, sophisticated institutional investors that have the capacity to build dedicated allocations to private debt, we expect a more diverse base of investors to begin investing given the appeal of the asset class.
The data in this article is drawn from the inaugural 2015 Preqin Global Private Debt Report, the latest edition to the five part series of reports also covering private equity & venture capital, hedge funds, real estate and infrastructure. Click here to find out more.
