Private debt AUM to hit $2.64tn by 2029

Private debt assets under management (AUM) are set to reach an all-time high of $2.64tn (£2tn) by 2029, with direct lending predicted to maintain its dominant position.

A new report from industry data provider Preqin forecast a 9.88 per cent compound annual growth rate for overall private debt from the end of 2023 to 2029. By contrast, it predicts that direct lending will grow by 10.18 per cent, reaching $1.33tn by 2029, and remain the largest segment of the market.

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Additionally, Preqin predicted that returns will increase substantially in the coming years, with the best performance coming from distressed debt.

The sector yielded an average internal rate of return of 8.1 per cent between 2017 and 2023, which should rise to 12 per cent between 2023 and 2029.

Distressed debt is predicted to produce the highest return, rising from 12.46 per cent to 13.36 per cent over the same comparative periods.

Read more: Growing bifurcation between higher- and lower-risk private credit issuers

However, Preqin said that the difference in performance between private debt overall and distressed debt is expected to narrow.

“Considering investors expect a premium for investing in risky strategies such as distressed debt, the forecast decline in this spread may be indicative of a more settled macro and credit environment,” the report said.

“This may be especially true in the case of a decline in interest rates which could lead to fewer defaults and distressed debt opportunities. Given the nature of the strategy, investors need to be positioned with an allocation ahead of any credit cycle distress, as opportunities for investing at discount to par may be substantial but short lived.”

Read more: Oaktree sees “flood” of opportunities among distressed borrowers