Private debt fundraising to rebound in 2024
Private debt fundraising activity is predicted to pick up again this year, after a dip in inflows in 2023.
According to PitchBook’s 2023 annual global private debt report, private debt fundraising activity from institutional investors totalled $190.9bn (£150.4bn) last year. The research firm expects the true total to breach $200m, as data from late reporting funds trickles in.
This is a “substantial” figure but it is likely to equate to a 10 per cent year-on-year drop in fundraising activity, PitchBook said, due to a weak second half of the year when just $76.7bn was raised.
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It partly attributed this to large funds staying open for longer. The average time to close a debt fund has risen to 20 months in 2023 from just 13.5 months in 2016.
Industry perception of the current fundraising landscape is mixed. Investor relations professionals at some private credit fund managers have told Alternative Credit Investor of challenging fundraising conditions.
But other stakeholders have suggested that the challenges vary depending on the funds’ strategies and the track record of the manager.
And a London-based private funds lawyer said their clients expect conditions to improve in the second half of 2024.
Despite last year’s dip in fundraising, investor interest in private debt remains high.
Private debt assets under management (AUM) neared $1.9tn inclusive of retail funds, with direct lending continuing to drive the sector’s explosive growth. The strategy surpassed $540bn in AUM in 2023, up from $70.8bn 10 years ago.
Increasing demand for private debt from new types of investors is expected to help drive growth in 2024. PitchBook noted that investment from “non-traditional vehicles and sources”, such as semi-liquid funds for retail and separately managed accounts for insurers, picked up steam in the second half of 2023. In the case of the seven largest managers that trade publicly, these channels account for nearly half of all fundraising for credit strategies.
Read more: Private debt diversifies from direct lending
Retail investors put $29.7bn into private debt funds in the second half of the year, up from $17.1bn in the first half.
“These are new addressable investor markets that these larger managers are doing a good job penetrating,” PitchBook said.
The income-generating aspect is what draws many investors in. A survey published last month by Adams Street Partners found that 81 per cent of respondents are looking to allocate up to 20 per cent of their private investments to private credit.
“The flexibility offered by private credit providers, coupled with attractive returns from floating-rate structures and greater lender protections, make the asset class highly favoured by investors and borrowers,” noted Jeffrey Diehl, managing partner and head of investments at Adams Street Partners.
There is clear interest in allocating more to private credit funds, particularly from European investors such as pension providers.
Danish pension fund Industriens Pension recently partnered with Nordea Asset Management on a new private credit fund, with senior portfolio manager Lene Boserup saying she expects the investment to provide a “solid and attractive return at a relatively low risk”.
Read more: Private debt AUM passed $1.6trn last year amid “explosive” growth
Meanwhile, a recent survey by Downing found that 94 per cent of UK pension providers want more exposure to private credit. And Goldman Sachs’ European Pension Survey found that seven in 10 managers believe private credit has the potential for increased returns without a rise in volatility. Two thirds of those surveyed plan to allocate to private credit over the next three to five years.
The returns on offer make the sector highly attractive to a wide range of investors. PitchBook said that 2023 was an exceptionally strong year for floating-rate leveraged loans, which represent the bulk of private debt fund holdings. The US Morningstar LSTA Index, which is a good proxy for how these loans performed, went up by 13.3 per cent last year – the highest annual reading since the global financial crisis (GFC) and the second-strongest return ever.
The equivalent index for Europe posted a nearly identical 13.5 per cent return, also a post-GFC high.
“These persistently high yields explain the continued attraction and strong relative performance of private debt funds,” PitchBook said. “Many are originating loans at yields that are equal to or higher than the bank-led syndicated market, which has retrenched significantly outside of refinancing and repricing activity.”
