As the alternative assets industry continues to grow, Preqin is launching an initiative examining the Future of Alternatives. In conjunction with key industry participants, we take a five-year look into the future to see where the market will be, what changes fund managers are planning for and how investors plan to invest in 2023.
This contribution is provided by Tom Carr, Head of Private Debt at Preqin.
The direct lending “story” has been well told over recent years: the financial crisis, banks deleveraging and retrenching, the tightening of regulatory regimes creating a discernible niche for direct lenders to raise capital and invest – primarily in the lower to mid-market segments of the market which were unable to access alternative sources of financing. What has been evident to date is that this growth has centred strongly around North America; with its strong and tested regulatory regime and history in the asset class, it currently accounts for nearly two-thirds (63%) of available dry powder. With direct lending delivering strong risk-adjusted returns in a low-yield market, alongside other attractive features like an inflation hedge (floating rate deals), predictable cash flows and J-curve mitigation, capital looks likely to continue to flow into the asset class.
However, there is rising concern that the market for both sponsored and, increasingly, non-sponsored deals in North America is becoming more and more competitive. This is leading to spreads tightening, which will likely eat into the eventual returns investors will see. With this in mind, and with managers telling Preqin that they expect the size of the private debt market to double to $1.4tn by 2023, what will be the drivers of future growth in the asset class?
The fund managers that Preqin interviewed are of the opinion that while the best opportunities in the market are currently focused on North America (as cited by 60%), this is going to evolve and globalize over the coming five years. Predictions for where the best opportunities will be in 2023 are far more diverse, indicating that the private debt asset class is primed to take hold in markets outside its traditional strongholds. In line with growth estimates, managers are expecting to put more capital to work globally, with emerging markets (58%) and Europe (50%) the areas that can expect to see the greatest increases in private debt activity. Compared to private debt’s current focus on North America, with the asset class looking likely to continue to grow exponentially, we can fully expect to see a far more globalized marketplace in 2023.
Download your copy of the Preqin: The Future of Alternatives here.