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The Fragmentation of Private Debt: Defining a Growing Asset Class – December 2014

by Craig Fuller

  • 11 Dec 2014
  • PD

With each successful fundraising cycle, private debt continues to grow and develop as a standalone asset class. The recent launch of Preqin’s Private Debt Online service reflects this, acting as the first and only source of data and intelligence covering private debt and serving all participants in the space. However, Preqin data suggests a clear fragmentation in the market, arising from varying viewpoints and definitions from those seeking to incorporate private debt strategies into their investment portfolios. With regard to the ongoing development of the asset class, this could be seen to be highly significant.

Currently, half of investors surveyed by Preqin commit to private debt from their private equity allocations. In these instances, it may be possible to observe a connection between this and a preference for mezzanine and distressed debt funds. Both of these strategies have long been pillars of private credit markets and are thus already well-established in the portfolios of many private equity investors. 

Conversely, the view of private debt as a fixed income instrument was expressed by 8% of investors surveyed by Preqin. Through this it is possible to observe the significance of the structural similarities of some private debt strategies, particularly direct lending, to more traditional fixed income vehicles. This further suggests a link between fund type preferences and how investors are classifying private debt and incorporating it into their portfolios.

The fragmentation of the private debt universe is further demonstrated by the 16% of investors gaining exposure to the asset class from more than one specific allocation, in addition to the 11% of investors who simply commit to private debt from a general allocation to alternatives. This would suggest significant opportunistic investing in the space. Opportunistic investments from such general allocations could in turn be indicative of a desire to access private debt strategies, which is accompanied by uncertainty about how to define them and where to place them.

Variation in investor preferences, fund structures and opportunistic investing could all be viewed as reasons for the current fragmentation of the private debt industry. As a result, the growth of private debt into a clearly defined, cohesive and independent asset class is an ongoing story.

However, the development of private debt in this way is evident in the 10% of investors already maintaining entirely separate allocations to private debt. It is in this development that the movement towards a more cohesive private debt space can be observed. The growing attractiveness of private debt strategies since the crisis of 2008, in conjunction with heightened awareness of them, means this trend looks set to continue. 

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