Once a niche area of the global asset management industry, private debt funds have emerged as a growing sector for return-seeking credit investors.
The funds, which are managed by people like Blackstone, Apollo, Carlyle and KKR, make direct loans to small and medium-sized companies with limited market access. By expanding lending, private equity funds are elbowing banks that became discouraged after the financial crisis and more recently the pandemic.
S&P Global estimates that the global private debt market has grown tenfold in a decade to $ 412 billion by the end of 2020. Assets parked in private credit funds have more than doubled in the past five years to a record $ 1.1tn last March, according to Preqin . In the first 11 months of 2021 alone, some 190 private credit funds raised a record $ 181 billion.
Behind the demand are two drivers: persistently low rates and declining returns in even the most risky part of the traditional debt market. The distributions in yields offered by riskier corporate bonds above U.S. treasuries reached a fresh low last summer.
Private debt offers higher fixed rate returns than public transactions as investors park their money in lower liquidity debt for a long time. This so-called “illiquidity premium” for private debt has gained appeal among yield-hungry institutional investors.
The focus on smaller companies means that direct lenders are often the only creditors, giving them more control over terms. It builds in two benefits: mitigating the risks of default and staying in the pole if it occurs.
Scalability and returns are the big issues as more investors enter the private credit world. Are there enough suitable small to medium size lenders to absorb all the cash looking for a home? And will the flood of money drive returns? Less stringent lending standards could mean a settlement in the next few years. The sold out in junk securities in November, investors in private debt funds should be nervous.
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