Private debt has emerged as a major component of the alternative assets landscape – but in order to establish itself as a permanent feature at the forefront, it will have to overcome its cyclical fundraising nature. Following large spikes in Q4 2017 and Q2 2018, fundraising in the industry has experienced several quarters of decline. Recent capital totals have been driven by a small number of large funds, rather than widespread fundraising activity, so it is unsurprising that activity has dwindled.
There are, however, positive signs for the future: direct lending funds are now fully established as the most prominent part of the asset class, and accounted for almost all of the fundraising that did occur in Q1. Many direct lending funds provide debt financing for corporate and private M&A activity, and the strategy has been spurred on in recent quarters by record private equity deal-making. The private equity deals market shows every sign of continuing its momentum in 2019, suggestive of plentiful opportunities for direct lending funds in the months to come.
By contrast, distressed debt funds had a very quiet quarter: just one distressed debt fund closed, and the strategy has not seen the same weight of interest as it has historically. This is notable given the widespread expectation among investors that a potential equity market downturn is due within the next 24 months. Given that distressed debt and special situations strategies are often counter-cyclical, and that 45% of investors are targeting distressed debt investments, we may expect increased activity in the coming months and for the strategies to recover their positions.
For more in-depth analysis on fundraising, fund currently in market, investors and more, download your copy of the Preqin Quarterly Update: Private Debt, Q1 2019.
To stay informed of our newest publications, sign up to our newsletter.