Private debt fundraising remains resilient despite market headwinds
While private capital and debt fundraising have moderated, 2024 is on track to surpass last year’s levels, thanks to strong direct lending volumes.
However, rising competition, economic uncertainty, and a challenging M&A landscape could pose risks for future growth, a new analysis from Morningstar DBRS has found.
The ratings agency found that fund managers with strong relationships and track records are still able to raise considerable capital for most recent fund vintages, with direct lending continuing to take the largest share of the capital.
“The strategy has generated strong risk-adjusted returns for investors and a reliable financing source for borrowers,” said the report.
“Nevertheless, headwinds are on the horizon with an uncertain mergers and acquisitions environment, which could lead to a slowdown in debt fundraising, and a dearth of good quality investments amid fierce competition.
Read more: S&P: Risk profile of private credit funds is changing
“Deterioration in underlying portfolio company performance remains a risk factor, resulting from either a higher-for-longer interest rate environment or an inability to manage any increased costs from potential tariffs.”
Morningstar DBRS found that capital raised for private equity strategies comprises the largest portion of total private capital fundraising, with private debt funds in second place.
Within the private debt segment, fundraising has been dominated by direct lending ever since 2017.
Morningstar DBRS found that ratings activity for investment funds has primarily been stable in 2024. The firm expects that to continue with ‘stable’ outlooks for investment fund debt and subscription loans for 2025.
“Our ratings universe has high-quality fund managers with a proven track record through varying market cycles,” says Manna Cheung, vice president, US structured credit ratings, funds at Morningstar DBRS.
“Nevertheless, we remain cautious as we have seen challenging or underperforming ramp-up of portfolios by weaker fund managers, which would lead to potential negative rating performance.”
Read more: New direct lending loans see uptick in quality
The ratings agency found that private capital fundraising activity has declined considerably over the past three years after reaching a record high of $1.77tn in 2021 . During the 12 months between the third quarter of 2023 and the third quarter of 2024, private market fundraising amounted to $1.37tn.
This is partly due to slowing institutional investor channels, as these investors wait to return capital before committing new capital commitments
During the first nine months of 2024, fundraising for direct lending dominated the other debt strategies with $121bn, representing 72 per cent of total debt strategies.
Read more: Morningstar warns of “headwinds” for private market firms
