Recent data in the Preqin Special Report: Private Debt proposed that direct lending within the asset class looks set to overtake mezzanine funds as the most attractive private debt vehicle. Data from the report shows that 55% of the institutional investors in private debt we surveyed have some exposure to direct lending funds. Furthermore, when investors were asked about their plans for the next 12 months, 72% confirmed they are expecting to allocate capital to direct lending funds, while 66% of investors surveyed plan to invest in mezzanine funds in the same timeframe.
The majority of capital inflow into direct lending funds is still coming from North America-based institutional investors, which represent 57% of all investors that favour the strategy, followed by Europe-based investors at 32%. Going forward, however, European appetite for direct lending could increase as investors continue to warm to the strategy. According to Preqin surveys, 33% of investors actively seeking to invest in direct lending funds over the next 12 months are Europe based. Interestingly, when examining investors that do not currently invest in direct lending funds but are considering allocating to the asset class via this strategy in the future, Europe hosts the majority of these investors. Fifty-nine percent of all investors considering investing in direct lending funds are based in Europe, compared to only 40% based in North America.
Logically stemming from growing interest in direct lending from investors, the number of managers raising direct lending funds is also increasing, particularly in Europe. Preqin’s Private Debt Online service shows that direct lending is the most common private debt fund strategy raising capital in both North America and Europe, of which there are 33 and 23 funds in market respectively. Although the number of direct lending funds being raised in North America is higher than in Europe, the strong growth trends in both investor preference and manager activity in Europe strongly suggests viability for the strategy as a fundamental component of illiquid investing moving forward.
North America continues to dominate the direct lending market in terms of capital inflows heading into 2015. This is to be expected, given the long history of non-bank lending in the region. However, Europe-based investor interest in the strategy continues to develop, as realized through Preqin’s direct communication with institutional investors worldwide. As a result, the market for direct lending in Europe in 2015 appears primed to build on its current momentum.