Direct lending AUM forecast to increase at 13.3% CAGR to $1.4tn by the end of 2028
Distressed strategies seen offering best returns amid cloudy economic outlook
Fidelity International latest to launch direct lending fund
Update: This story has been updated to include new comment and add further background on fundraising.
October 17, 2023 (Preqin News) – Global private debt assets under management (AUM) could almost double from 2022 levels and reach $2.8tn by 2028, driven by continued growth in direct lending, latest forecasts from Preqin show.
Global private debt AUM is forecast to grow from $1.5tn in 2022 at a compound annual growth rate (CAGR) of 11.1% to 2028, according to models used in Preqin’s Insights+ report, Future of Alternatives 2028, published today.
Direct lending will contribute the largest share of AUM growth, increasing by 13.3% to reach $1.4tn by 2028.
Growth in direct lending accelerated following the Global Financial Crisis (GFC), when tighter rules and changes to banks’ approach to corporate lending provided an opportunity for non-traditional lenders to fill the credit gap. The collapse of Silicon Valley Bank (SVB) earlier this year, coupled with concerns about the health of regional US banks, has given the asset class renewed vigor.
Meanwhile, investors are attracted to a return premium over fixed income and use of floating rate structures, while private debt offers a shorter time to maturity and lower risk profile relative to other private market asset classes.
Private debt has attracted many new entrants in recent years and any sustained hesitancy in lending by banks could offer potential upside to Preqin’s AUM forecast, its analysts said.
'Broadly speaking, businesses are looking for other sources of capital aside from traditional lenders and they are finding that private debt gives them, in addition to certainty of execution, potential for increased flexibility,’ said RJ Joshua, Head of Private Debt in Preqin’s Research Insights team. ‘For lenders, they are finding private debt benefits them in that they have direct relationships with good alignment of interests, while enhanced covenants provide them with the flexibility that they too want.'
Direct lending funds have raised $80.8bn so far this year, still short of the record $145.1bn raised in 2021. Some 565 direct lending funds are currently in market, however, seeking a total of $258.3bn. Preqin’s Forward Calendar also indicates that more managers could come to the market with large fund launches in the fourth quarter, including KKR, Crescent Capital Group, Audax Group, and Redwood Capital Management.
Meanwhile, a cloudier economic picture could help distressed debt boost private debt’s overall performance, with the strategy forecast to return 14% in 2022 to 2028, compared with an internal rate of return (IRR) of 7% for 2016 to 2022. With other private debt strategies set for limited changes, according to the report, IRR for private debt as a whole is forecast at 9.8% for 2022 to 2028, a slight increase from 9.1% for 2016 to 2022.
North America is set to retain the largest chunk of targeted private debt AUM, forecast to increase from $912.7bn in 2022 to $1.7tn by the end of 2028. Europe’s AUM, meanwhile, is predicted to grow from $399.7bn to $860.5bn by the end of 2028, underscoring the depth of demand for private debt in the region.
Fidelity International is the latest asset management firm to tap that demand, announcing the launch of its first direct lending fund on Monday. The firm, which has $744.8bn AUM, completed a senior financing package to Netherlands-based Clinias Dental Group, the inaugural transaction of the Fidelity European Direct Lending Fund targeting mid-market firms in Northern and Western Europe. The fund has a target of €800mn and a €1bn hard cap, according to Preqin Pro.
‘A growing and broader profile of investors are joining the structural trend to add and increase private assets allocations within their portfolios, and we expect this to expand further over time,’ Michael Curtis, Head of Private Credit Strategies at Fidelity International said in a statement accompanying the launch. ‘Demand for private credit has soared in recent years as institutional investors seek relative safety of a secured debt product, providing floating rate income and positioned at the most senior point of the capital structure.’
In addition to private debt, Future of Alternatives 2028 also examines the outlook for private equity, venture capital, secondaries, infrastructure, real estate, and hedge funds.
The opinions and facts included within the above do not constitute investment advice. Professional advice should be sought before making any investment or other decisions. Preqin providing the information in this content accepts no liability for any decisions taken in relation to the above.