Is this really a ‘golden age’?

Private debt GPs, in common with GPs across all private markets, found fundraising to be a challenging task in the first half of 2023. Our data showed that just $84 billion was raised for private debt globally in H1 this year – the lowest total for the equivalent period since 2016.

The major reason typically cited for this was the trauma experienced by public markets, which has led to a denominator effect and tied investors’ hands when it came to new allocations of any type – including private markets.

This was a practical issue that did not indicate investors had lost faith in private debt – to the contrary, surveys – our own and others – have consistently suggested that sentiment towards the asset class is more positive than ever. Moreover, LPs are generally underallocated to private debt and keen to commit more capital to address this.

At our New York Forum last week, reference was made to a “golden age of private credit”. So what, we ask, could possibly go wrong? Surely fundraising capital will flow freely again before much longer? While that may indeed be the case, investors at the event urged caution and highlighted a number of concerns that they feel should mitigate against complacency.

It was pointed out that while those lending on a floating-rate basis stand to benefit, rising rates would nonetheless pressurise borrowers and likely force up the default rate – at least one investor at the event feared a rise to as much as 9 or 10 percent, though estimates of this vary greatly.

While it may indeed be a “golden age” for current vintages, there was a view that recent past vintages may struggle unless considerable underwriting discipline has been applied. “What happens when the music stops?” was the rhetorical question posed.

It was also said that a “higher for longer” rate environment would not sit well with the increased leverage that was liberally used when rates were at or near zero.

Concerns were further expressed around the more stringent recent demands from the SEC (currently being challenged in the courts), private debt’s reputation as a laggard on the ESG front and the appropriate level of fee charging in a more sober environment – should hurdle rates stay the same, for example? None of these worries are likely to derail the private debt train – but they should perhaps give pause for thought.

Write to the author at andy.t@pei.group