Private debt takes a hit as competition increases

The broad performance of private debt declined towards the end of 2016, as figures show increasing competition within the industry.

The performance of private debt funds was down quarter-on-quarter at the end of 2016, according to recent figures released by State Street Global Exchange. At the same time, a recent study from DLA Piper notes competition to provide acquisition finance is increasing, driving down pricing.

According to State Street’s Private Equity Index, which tracks the performance of various private equity-type strategies, private debt returned 3.07 percent during Q4 2016. That number is down from the 3.59 percent returned by the asset class in Q3.

The decline in performance comes at a time when competition is increasing within the private debt industry. DLA Piper’s European Acquisition Debt Finance Report 2017 notes increasing competition, particularly around larger deals, has led to something of a pricing squeeze.

According to the report, European dealmakers believe pricing for unitranche facilities has fallen by roughly 50 to 75 basis points based on where it was two years ago. In senior debt, pricing has come down roughly 25 to 50 bps during the last 12 months.

While both pricing and performance seems to be falling slightly, private debt as an asset class remains popular, particularly compared with other fixed-income alternatives.

According to figures from Evestment, credit-oriented hedge funds saw $46 billion worth of outflows during 2016. At the same time, according to a recent PDI survey of LPs, conducted at the end of 2016, 47.7 percent of investors plan to make a fresh primary private debt fund commitment during 2017.

Committment chart 411

CLICK HERE TO ENLARGE CHART