With Preqin’s Private Debt Online service providing a global database on the private debt asset class, it is possible to identify important geographic trends and disparities within the space. What emerges when looking at investors’ recorded preferences regarding investment in the asset class reflects a largely sustained, and in some cases growing, demand for various strategies across private debt as a whole. The chart below offers a comparison of the strategy preferences of private debt investors according to respective location.
Preference for Distressed Debt in North America
Of investors based in North America, 73% have indicated a preference for distressed debt funds, confirming it as the most attractive private debt strategy in this region. This contrasts sharply with Europe, where 47% of investors indicated a preference for distressed debt funds. For investors based in Asia and other regions, the strategy appears more attractive with 56% stating a preference for distressed debt. However, this still places it behind mezzanine, which appears to be the most attractive private debt strategy in the Asia & Rest of World region. Importantly, this is also true for Europe, with 73% of investors in the region exhibiting a preference for mezzanine funds. This suggests a larger relative market for distressed debt vehicles in North America.
Preqin’s historical fundraising data shows that 54 direct lending vehicles held a final close in 2014 – more than double the 24 direct lending funds that closed in 2012. It is possible to view this as confirmation of the substantial growth of direct lending in recent years. The number of distressed debt funds to have closed since 2010 has remained steady at approximately 25 each year, while mezzanine fund closures have shown fluctuation year on year. Nevertheless, the data shows that while their respective positions differ across the regions, direct lending, distressed debt and mezzanine funds continue to appear as the top three most preferred private debt strategies, both for investors and private debt fund managers.
Lighter Demand for Venture Debt and Fund of Funds
The chart also suggests relatively lighter demand for fund of funds structures and venture debt funds in North America, Europe and Asia & Rest of World. Those seeking exposure to private debt through fund of funds structures may well be new to the space, with little or even no exposure to the asset class elsewhere, and could be seen to be opportunistic investors at this point. As for venture debt, this has traditionally been a niche area of the private credit markets given the high risk associated with the strategy.
It is certainly true that many factors shape the strategic preferences of investors. Their existing exposure and experience within the private debt space, the perceived risk, regulatory environment and available returns do all appear to be very important. Such factors go some way to explaining the regional disparities in investor preferences within the private debt asset class. For more information on the regional investor spread within the asset class and to see the reasons why investors allocate to private debt, please view the Preqin Investor Outlook: Alternative Assets, H2 2015, which comprises results from our latest survey of over 100 investors in private debt.