With the decline of traditional lenders comes growing opportunity for the private debt industry. After total private debt fundraising in 2015 broke $100bn for the first time, all the signs point towards a continuation of this steady industry growth: Preqin anticipates that the market will have doubled in size by 2023, reaching $1.4tn in assets under management. If our predictions prove correct, then the private debt market will also have overtaken real estate to become the third largest alternative asset class.
Private debt fund managers appear confident in their individual prospects for growth, trusting that the high levels of interest from investors will continue to grow in the next five years. Among those surveyed by Preqin in June 2018, 93% expect organic growth to help them expand their offering in the coming years.
How does this sit in line with investors’ expectations? Among private debt investors surveyed by Preqin, 62% intend to increase their allocations to the asset class over the next five years. This is the third largest proportion among alternatives, behind private equity and infrastructure, and suggests a steady influx of capital into the industry in the near future. This positive outlook is supported by the fact that only 2% of respondents intend to decrease their allocations to private debt by 2023, tied with private equity as the smallest proportion among alternative asset classes.
Movements in the wider alternatives universe suggest a greater focus on investment in emerging markets in the next five years: 46% of alternatives fund managers feel emerging markets will present the best opportunities in 2023. Furthermore, 19% of investors are not currently invested in emerging markets but plan to be by 2023. Although North America has long been the stronghold for the private debt industry, if such projections materialize it could well be the case that more capital begins to shift towards emerging markets.
Another belief that unites investors and fund managers in most alternative asset classes is that environmental, social and governance (ESG) policies and practices will be of greater importance in 2023 relative to now. And private debt is no different: 76% of investors and 77% of fund managers surveyed anticipate that ESG considerations will be held in higher esteem in the industry, as demands for responsible investing and ethical transparency continue to shape alternatives.
As the effects of recent advancements in financial technology – such as AI/machine learning and big data processes – are only just beginning to ripple through the alternatives industry, it remains to be seen how the private debt industry in particular will be impacted by such changes. Most fund managers and investors across alternatives are, however, in agreement that such technologies will be more relevant to alternatives in 2023.
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