Signs of moderation in direct lending returns
There are some early indicators of moderation in direct lending returns, despite the outperformance of the private debt markets.
New research from Preqin found that private debt continued to outperform equity strategies in the first nine months of 2024, delivering a 6.3 per cent return for investors. This is down from a return of 9.4 per cent in 2023, although private debt remains the top performer within alternatives.
The Preqin Performance Pulse H1 2025 report warned that the first signs of moderation in direct lending may already be visible, as investors may look for yield by moving up the risk spectrum. This could result in higher allocations to mezzanine, which was the top-performing sub-strategy on a trailing one-year basis as of the third quarter of 2024, with a return of 11.1 per cent.
Read more: Private credit downgrade activity ticks up slightly
Overall, private capital has underperformed compared with public markets since 2023, Preqin noted, with only private debt performing in line with investors’ target range of returns.
Infrastructure has been the top performing alternative asset class over a three year interval, while private equity funds have lagged behind private debt, returning just 3.6 per cent in the first three quarters of 2024.
Venture capital saw the most disappointing returns, with venture capital round downs affecting one in five companies.
Read more: UK debt market activity rose in Q4
“For two years now, private capital performance has lacked lustre, not only compared with public markets but also according to investors’ target returns,” said Angela Lai, head of performance and valuations, research insights, at Preqin.
“On an annualised basis, only private debt performance was firmly within investors’ target range of returns, which are clustered around eight to 12 per cent.
“On the other extreme, venture capital investors would be the most disappointed; they typically target more than 20 per cent, but venture funds have been on a three-year losing streak.
“We believe that the slowdown in exit activity is a key reason for the underperformance vis-à-vis public markets for both private equity and venture capital.”
Read more: Private debt fundraising remains resilient despite market headwinds
