“Too much money chasing too few deals” is a phrase you hear regularly whenever fears surface that competition is reaching unhealthy levels. Few would claim that private debt is an uncompetitive asset class, but new data indicate that capital held in reserve is at a rather subdued level.

At the end of last year, dry powder as a percentage of global private credit assets under management stood at 37 percent, according to the Financing the Economy 2018 report by law firm Dechert and industry body The Alternative Credit Council. This is below the 18-year average of just over 40 percent.

What this suggests is that there is no wave of private debt capital poised to be unleashed, inflating valuations in the process. The danger of that was in fact considerably higher in the pre-global financial crisis years, with dry powder reaching more than half of global private credit assets under management in 2003. In every year between 2001 and 2008 (when the crisis struck), the proportion of dry powder was higher than last year.

But while the proportion of dry powder is lower now, the asset class’s global AUM are higher in absolute terms than they have ever been. Dechert and ACC repeated a claim made in the equivalent report a year ago that the industry is on track to exceed $1 trillion in assets under management by 2020. What the low dry powder figure shows is that fund managers appear to be having little trouble in putting the capital to work.

In terms of where the capital is going, it appears to be overwhelmingly to SMEs and the mid-market. According to the survey, this part of the market accounted for 43 percent of allocations made by smaller private credit managers and – perhaps more surprisingly – 38 percent of those made by larger managers. Although private debt’s penetration of the larger end of the market is growing, only 12 percent of allocations by larger managers are currently going to large corporates.

Real estate is also a popular area for credit investment, but mainly with European managers. The survey finds that 19 percent of allocations by European managers are going into real estate, but only 5 percent of allocations made by North American managers.

In terms of where managers see their investment increasing over the next three years, the most popular areas are the SME/mid-market and distressed. The 42 percent of managers seeing an increase in distress indicates that optimism may be slipping in the ability of the asset class to fend off a turn in the cycle for much longer.

While a downturn may be bad news for parts of the credit market, distressed specialists will welcome the opportunity to finance a larger population of borrowers. One private manager told the survey that any bank removing distressed debt from its loan book would provide an opportunity for a private credit manager to develop a relationship with borrowers that may previously only have used bank financing.