While the overall narrative of private debt has been of strong long-term growth, in Q2 2019 the asset class is undeniably in a slump. Fundraising in the first half of the year has sunk to its lowest level since 2016, new funds coming to market are generally fewer and smaller than their predecessors, performance is flat across most strategies, and investor enthusiasm seems to be waning.
But there are positive signs: although flat, performance is positive in the longer term, and mezzanine funds in particular are showing very high returns. Dry powder has fallen slightly since December 2018, indicating that fund managers are putting capital to work. And while investor appetite is slipping, it remains significant.
This is a crucial period for the industry to show how it can bounce back and revive investors’ enthusiasm. Performance is key to this, not just in terms of IRR but also cash flow: two of the leading reasons investors seek private debt are high risk-adjusted returns and a reliable income stream. The other critical factor will be fund managers deploying some of the dry powder that has built up. A small decline in the first half of the year is encouraging, but investor enthusiasm for further commitments will likely remain elusive while so much capital sits unused.
Private debt is a diverse industry – it is unlikely that any one approach will be best to weather potentially turbulent times ahead. Given that today’s asset class bears so little resemblance to the industry in 2007-2008, many firms and strategies have not been tested in a downturn. What is certain is that how fund managers respond will affect the future of private debt for years to come.
For further in-depth analysis on fundraising, deals, performance and investor data from the quarter, download the newly-released Preqin Quarterly Update: Private Debt, Q2 2019.
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