Private debt ‘standout performer’ but weaker returns forecast in 2025
Private debt has been the ‘standout performer’ among alternative investments over the last two years, but weaker returns are expected in 2025, according to a new report.
A third (35 per cent) of respondents to data provider Preqin’s Asset Allocation: Outlook 2025 report said they expect private debt to perform worse this year, while only 13 per cent forecast better returns, and 52 per cent expect performance to stay the same.
This is despite private debt having recently outperformed equity-focused strategies and provided liquidity to limited partners over the past two years, something other asset classes have struggled to offer, as the Preqin report points out.
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Private debt, particularly direct lending loans, has benefited from rising interest rates because of its floating-rate characteristic.
Global private debt returns (by IRR) for 2023 and 2024 were 8.4 per cent and 8.8 per cent, respectively, according to the Preqin report, on a rolling basis ending September of that year.
Preqin forecasts the asset class’ returns will be 12 per cent net IRR on an annualised basis from 2024 to 2029.
But with interest rates now edging downwards, loan yields have already begun to fall, and achieving the relatively high returns seen in recent years may not be possible for private debt in 2025, according to the Preqin report.
“Our view is that private debt is likely to continue broadly on its current level of returns as older vintages roll off, boosting performance, but the headwinds may start to chip away in 2025,” the report stated.
Less favourable conditions include a record number of funds currently raising capital, placing downward pressure on yields, and deployment opportunity growth remaining flat as private equity M&A activity remains muted.
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However appetite for private debt remains strong – 84 per cent of private debt investors told Preqin they intend to commit the same amount or more capital to the asset class in 2025.
And recent US policy decisions may mean rate falls come to a halt, which will continue to support higher yields.
“For 2025, we expect investors to continue increasing allocation targets to private debt to achieve several goals: supplementing income generation, increasing diversification on cash flows, and limiting loss rates compared with liquid debt alternatives,” Paul Sinthunont, vice president of research insights at Preqin said.
“Growing opportunities within asset-backed finance and NAV loans are also to be watched closely.”
Read more: More than one-third of dry powder is held by top 20 private credit managers
