Sharp moves in interest rates weighed on fixed income assets in Q1, with the Bloomberg Global Aggregate Index falling by 11% from its January 2021 highs. Subsequently CPI inflation hit 8.6% year on year to May 2022 – the largest 12-month increase since the period ending December 1981.
Inflationary pressure came from the energy component in particular, which rose by 34.6%
over 12 months – the biggest 12-month increase since September 2005. In addition Q2 saw a further move in the US 10-year Treasury, as the hawkish path the Federal Reserve was taking became clearer.
With further interest rate hikes seeming likely, we expect that private debt will attract more attention from traditional fixed income investors. Rising yields could broadly boost private debt fund performance, given that most private debt products are floating rate, so their valuations are less sensitive to rising rates. As it has been less directly impacted by central bank intervention, institutional investors are therefore turning to the private debt market.
Despite all the challenges, investors are happy with private debt. Our recent investor survey showed that investors continue to favor private debt for its diversification benefits and reliable income stream.
The floating rate exposure and downside protection it affords are key benefits.
In this research we discuss Preqin’s forecast for private debt. New for this year, we are forecasting performance, as well as discussing fundraising AUM. We will first consider the results at a global level, before drilling down into each of the major geographies: North America, Europe, APAC, and Rest of World.
Private debt strategies are broken down into three buckets for modeling purposes: direct lending, distressed debt, and SS&MD (special situations and mezzanine debt). SS&MD are modeled together and can be thought of as higher-risk debt strategies.
Private debt global forecast
Preqin forecasts that private debt AUM will grow at a CAGR of 10.8% between 2021 and 2027 to reach an all-time high of $2.3tn in 2027 – a significant increase from the 2021 figure of $1.2tn (Fig. 3.1). With all alternative assets AUM growing at 9.3% CAGR, over the same period, private debt is gaining share overall.