Private debt markets across the globe saw significant activity throughout 2014. Preqin’s Private Debt Online service shows that a total of 100 private debt funds were closed last year having raised just under $60bn.
As shown in the chart below, which breaks down the last year’s fundraising by quarter, the number of private debt funds closed reached its peak in Q2 2014, with 33 private debt funds reaching a final close. The subsequent fall in this number that followed in Q3, when viewed in conjunction with a similar fall in the amount of capital raised and the average fund size, may well be indicative of greater competition for capital within the space. That this fall was then followed by a significant increase in the amount of capital raised and the average fund size, both of which were at their highest levels in Q4 2014, shows that a number of managers were able to raise substantial capital. Such fundraising competition and growth is reflective of the expansion of the asset class and its continued development.
In many ways, this growth has been driven by the rise of direct lending, which, by the end of 2014, can be viewed to have become the prevailing debt strategy. Direct lending funds made up 45% of private debt funds closed in 2014, in comparison with mezzanine and distressed debt funds which formed 26% and 16% of funds closed respectively. Indeed, the growth of direct lending is in stark contrast to the drop in mezzanine lending, perhaps the result of companies that seek debt capital looking towards cheaper and less intrusive debt solutions. Despite this, both mezzanine and distressed debt strategies are likely to continue to stand as important pillars in the private debt market, as they have done for decades, but the rise of direct lending has been significant. Structured in a similar way to fixed income funds, these vehicles are often a better fit for conservative investors relative to traditional private equity vehicles.
The growth of private debt throughout 2014 has also been fuelled by significant expansion in Europe. While North America remains the dominant region in the private debt space, with 50% of all private debt funds currently in market targeting the region, Europe-focused private debt funds experienced a significant increase in activity throughout last year. In 2014, 23 Europe-focused funds were closed, constituting 24% of all funds. This is an increase of 53% when compared with the number of Europe-focused private debt funds closed in 2013. Divestment of loans held by European banks, which are under pressure from government and regulatory bodies, as well as new loan activity, has bolstered the attractiveness of the environment for the purchasing of assets and alternative financing solutions offered by private credit managers. In many ways, the development of the European market has highlighted the private debt story.
Given the substantial increase in aggregate capital raised in the last quarter of 2014, confidence in private debt certainly seems high. The 196 funds currently in market, with an aggregate target size of over $110bn, further suggests that this is the case. From such figures, it would appear that the momentum gained in 2014 has carried into 2015, with private debt looking set to experience continued growth moving forward.