Direct lending funds are driving growth in the private debt marketplace, and are the main strategy for private debt fund managers set up since 2008, according to a new report from Preqin, an alternatives data and information provider.
The report said 72% of institutional investors that are active in private debt planned to invest fresh capital in direct lending funds in the next 12 months.
These are often considered a better fit for more conservative investors in the private debt space in that their structure is similar to fixed income investments compared with more private-equity-type methods, such as mezzanine and distressed debt funds.
Preqin reported that 137 private debt funds had closed in 2013, up 46% over 2012, raising an aggregate $77 billion, a fundraising peak.
This year, fundraising has cooled with 69 funds having raised a total of $37 billion so far, Preqin said. However, funds on the road have targeted $101 billion, highlighting the market’s capacity for significant growth in 2015.
“The increase in investor preference for exposure to direct lending funds is reflected in the amount of vehicles raised in recent years,” Preqin’s head of private debt products, Ryan Flanders, said in a statement.
“This shift toward direct lending vehicles is likely due to the market opportunity for lending by nonbank entities in the wake of financial regulation and bank deleveraging, as well as the fund type providing favorable risk/return profiles compared to other similar investments.”
Ryan said this continued growth in non-bank lending or alternative credit bodes well for the middle market borrower whose needs for capital traditional banks have not filled.
“Exposure to this evolving asset class may continue to be attractive to institutional investors in a low-yield environment,” he said.
“Preqin has witnessed many investors set up dedicated allocations to the asset class, which looks set to continue as private debt grows and becomes more defined throughout 2015.”
Other Key Findings
- Fifty-two percent of funds closed so far this year have focused on North America, down from 66% in 2013
- This year, Europe has accounted for its biggest share of overall fundraising, with 33% of capital raised by funds closed so far focused on the continent, compared with 21% in 2013
- Direct lending is the main strategy of 40% of private debt fund managers established since 2008, compared with 36% that are focused on mezzanine investments and the remainder on distressed debt, special situations and venture debt
- Two-thirds of private debt fund managers are based in North America, 24% in Europe and 10% in Asia
- Vintage 2001–2011 direct lending funds have a median net IRR of 8.9%
- While 48% of investors currently allocate to private debt from their private equity allocations, 8% invest from their fixed income portfolios and 9% from a dedicated private debt allocation.
— Check out Private Conservation Impact Investing Growing 26% Annually on ThinkAdvisor.