Private debt diversifies from direct lending
Direct lending now makes up less than a third of the global private debt market as the asset class continues to diversify into other strategies.
PitchBook’s 2023 annual global private debt report found that direct lending accounted for 31.8 per cent of all fundraising for private debt last year, which totalled $190.9bn (£150bn) across the sector.
This is down from almost half of all private debt fundraising in 2021.
Other strategies have seen growth over the past year, namely mezzanine and infrastructure debt.
Mezzanine debt bridges the gap between senior debt and equity financing and is one of the higher-risk forms of debt, producing returns of up to 20 per cent.
Read more: Mezzanine debt set to grow in 2024
$36.1bn was raised for mezzanine funds last year, up from 16.5 per cent in 2022.
The three largest private debt institutional funds closed last year were mezzanine funds, comprising the eight flagships of Crescent Capital and Goldman Sachs under the West Street brand and HPS Investment’s fifth flagship fund.
“Mezzanine funds have responded to the unmet need for subordinated debt,” PitchBook said.
“Mezzanine’s junior position in the capital structure means that it does not count against limits on senior loan ratios—an appealing option for borrowers that need an extra turn of leverage. Additionally, mezzanine lenders are more comfortable with paid-in-kind structures – a popular feature in today’s market in order to conserve cash flow.”
Read more: Direct lending returns will “more than offset” higher defaults this year
Meanwhile, infrastructure debt fundraising more than doubled from 2022, with eight fund closings in 2023, including two of the top 10 largest private debt funds of the year.
In August 2023, Blackstone announced the final close of Blackstone Green Private Credit Fund III at $7.1bn, which was the largest energy transition private credit fund ever raised.
Pitchbook also noted increasing private debt activity in asset-backed finance, a market which was traditionally dominated by banks.
“Private debt is broadening well beyond its traditional roots in direct lending and distressed investing to encompass new opportunity sets in investment grade,” said PitchBook’s report.
Read more: Private debt AUM passed $1.6trn last year amid “explosive” growth
“Asset-backed finance is the next frontier that private credit managers are pursuing, picking up share from banks as they are forced to give ground.”
Overall private debt fundraising activity is expected to surpass $200bn for the fourth year after data from late reporting funds is included, although this is expected to equate to a 10 per cent year-on-year decline.
This was due to a weak second half of 2023 when just $76.7bn was raised, which PitchBook attributed to large funds staying open for longer.
