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Are We on the Precipice of a Private Debt Crash?

by Naomi Feliz

  • 19 Dec 2018
  • PD

Private debt funds can act like a bank, providing loans to businesses that are too small to go on the bond market, but too big to solely rely on loans from their local credit union. This important financial model has led to the booming growth of direct lending within the asset class. However, there are concerns about the levels of capital pouring into the industry, perhaps expanding the once niche market past its stretching point.

2017 was a banner year, with 186 funds securing a record $131bn. 2018 has also been a strong year for private debt fundraising, with 146 funds closing and raising an aggregate $104bn as at the beginning of December. This puts the average fund size in 2018 to $796mn, a slight increase from 2017 when the average was $783mn.

Until 2017, the average private debt fund size had not crept past the $700mn mark since 2007, when 104 funds raised $75bn at an average of $753mn. In 2008, average fund size ballooned to $979mn, right before the private debt market tumbled in 2009.

Top-level fundraising activity may appear worrisome: at first glance, 2017 and 2018 figures look similar to the 2007-2008 period – right before private debt fundraising crashed in 2009. However, fund managers are showing that they are able to spend their capital, and deal activity continues to rise steadily. Furthermore, performance for younger funds remains strong, as funds with more recent vintages have generated returns similar to, and in many cases higher than, older funds.

Although many investors are expecting an equity market downturn, it is too early to tell if the private debt market will see a crash like the one in 2009. The private debt market is still doing well and will continue to do so in the upcoming future, but nonetheless could be poised for some troubling times.      

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