The emergence of the private debt asset class has been a global phenomenon. Preqin’s Private Debt Online service holds data on investors, fund managers, funds in market and historical fundraising from across the globe, and the data suggests several important regional disparities.
As illustrated in the chart below, North America-focused funds stand at the forefront of the private debt asset class. This is perhaps unsurprising given the long tradition of alternative lending within this market and its consequent maturity. Interestingly, distressed debt funds appear to be the most dominant private debt fund type in this region by capital raised. In 2014, distressed debt funds accounted for 36% of North America-focused capital raised in the private debt space. This is in part explained by the relatively large size of distressed debt funds. Direct lending funds were the next most utilized strategy in 2014, accounting for 34% of North America-focused capital raised last year.
A significant increase in Europe-focused private debt funds over the past year seems to suggest a desire among private debt investors to look beyond the North American market. Between 2013 and 2014, the total aggregate capital raised by Europe-focused private debt funds increased by 16% to $19.5bn, driven by direct corporate lending opportunities, divestment of loans held by European banks and favourable regulatory developments. Within this context, direct lending funds have gained significant traction in the marketplace and have risen to become the prevailing debt strategy in Europe. In 2012, direct lending funds constituted 19% of Europe-focused funds that reached a final close during the year, while distressed debt and mezzanine funds made up 38% and 31% respectively. By 2014, the composition of the European marketplace had changed significantly, with direct lending funds forming 57% of funds closed that year, distressed debt just 9% and mezzanine 22%.
Yet more differences emerge when comparing both the European and North American markets with Asia & Rest of World region. Indeed, fundraising conditions have proven difficult for this region in 2014, with the amount of capital raised by funds focusing on these areas falling for the third consecutive year. Given the significant proportion of Asian fundraising traditionally accounted for by China-focused funds, this trend could be partially attributed to a shortfall in LP commitments to vehicles targeting investments in the country, which could be linked to concerns over the slowdown in China’s GDP growth and a lack of exit opportunities. Another possible explanation could be the youth of the private debt market in these regions and the subsequent lack of institutions and transparency deemed vital to investors.
Furthermore, while the Asia & Rest of World region has witnessed similar growth in direct lending, this growth has not been as rapid or significant as in Europe and North America. With special situations funds representing 33% of funds focusing on the region closed in 2014, it appears to be the most attractive strategy in this part of the world. Mezzanine funds (26%) accounted for the next largest proportion of funds closed, followed by direct lending (24%) and distressed debt funds (17%). This stands in stark contrast to the fundraising activity seen in Europe and North America, where special situations do not form such a substantial proportion of the market.
It is clear that the evolution of private debt into a truly global asset class continues to be driven by local conditions, in turn spawning substantial regional disparities significant for both investors and fund managers.