The last decade in private debt

The past 10 years has seen debt move firmly into the investment mainstream, with signs of continued growth ahead.

Ten years ago, Private Debt Investor launched at a time when the asset class was just beginning to achieve scale. We had a sense that plenty of growth lay ahead but could not have foreseen the extraordinary explosion in the number of managers and level of institutional support that has been witnessed since. 

In its Financing the Economy Report 2022, the Alternative Credit Council noted that global private credit managers deployed no less than $127 billion in 2021. In the same year, general partners were busy raking in more than $289 billion in fresh capital from investors, according to PDI data. Safe to say private debt has spent the last 10 years becoming an increasingly mainstream part of the financing landscape. 

As we look to the last decade, we explore in depth many of the most significant landmark developments relating to fundraising, deals, strategic initiatives, regulation, the macroeconomic backdrop and much else besides. In a “look forward” to the next 10 years, we consider topics such as retail investment, the energy transition, ESG and impact investing, fund finance and the rise of Asian investors.

You will also find “Changemakers”, which focuses on the individuals who have played a crucial part in influencing the asset class’s evolution. 

As we celebrate PDI’s 10-year landmark, it would be somehow appropriate if our anniversary year was plain sailing for the asset class: a continuing upward curve in its impressive growth trajectory. Appropriate, but not the reality that is being faced. Hampered by the denominator effect after the collapse of public markets, limited partners are struggling to match their faith in the asset class with ongoing commitments. 

According to our data, the first quarter of 2023 was one of the most sluggish first quarters for fundraising in living memory. 

For borrowers, these are challenging times. We know all the reasons why, of course: war in Europe, the energy crisis, inflation, rising interest rates, continuing supply-chain bottlenecks and labour shortages. For companies that have grown accustomed to ultra-low interest rates and a generally benign trading environment, the new phase we’re heading into appears less than appetising. 

Many are fearful of a refinancing environment that looks a lot more challenging than a few years ago. “If you were fully levered in 2020 and you’re trying to refinance in 2025 with base rates up, these kinds of rates we expect will kill cashflows on any business,” said Tristram Leach, partner and co-head of European corporate credit at Apollo Global Management, in a feature by PDI’s John Bakie, published in April this year. “Unless you’re growing very fast then you cannot carry six turns of leverage.” 

Recession? Bring it on

Of course, not all private debt is predicated on the assumption that a rosy macro-economic environment is ideal. Distressed and special situation investors may rightly conclude, as we quite possibly stand on the precipice of recession, that their turn has finally come. “If we don’t see distressed now, we won’t see it ever,” said Certior Capital’s Ari Jauho, dramatically and to more than a few laughs, at the PDI Europe Summit in May. 

Moreover, it’s not necessarily just the distressed corner of the private debt universe that stands to benefit from growing economic pressures. Direct lending was formed from the severe strains the banking community was placed under during and after the global financial crisis of 2007-08. Earlier this year, we saw echoes of that with the crisis that enveloped US regional banks, most notably Silicon Valley Bank and Signature Bank, while in Europe a beleaguered Credit Suisse was swallowed by UBS. Bank retrenchment is once again being mooted as the banks face yet more regulation – and private debt in general stands to benefit from this by grabbing even more market share. 

It may be counterintuitive, but many limited partners also view private debt’s challenges with a positive slant. There is a view, after all, that this is an asset class that has had it a bit too easy. The last 10 years have mainly aided and abetted the relentless growth of the asset class. When covid took hold, some industry commentators speculated that private debt’s first big test had finally arrived. But, while some hastily raised dislocation funds flourished, covid turned out to be a footnote as the private debt juggernaut rolled on – by the second half of 2021, private debt was riding on the shoulders of an M&A boom. 

Now, there is a view that LPs will finally be able to distinguish the best fund managers from those who were along for the ride. Who had the best underwriting standards? Who ensured they were well protected in the documentation? Who selected the most robust businesses in the most resilient sectors? Faced with the ultimate test provided by an economic downturn, answers to these questions should become apparent. 

Moreover, what should be a huge information gathering exercise about how private debt performs in bad times as well as good should give investors more confidence to make allocations to the asset class once their practical challenges around the denominator effect have been resolved. After all, there is little doubt that investors are still big supporters of the asset class in principle: our LP Perspectives Study 2023 revealed 38 percent of investors were keen to invest more in private debt in the next 12 months than in the previous 12, while 51 percent would keep the amount the same and only 11 percent would invest less. 

If the capital does keep flowing, it will likely be invested in one of the best vintages in private debt’s history thanks to the floating-rate nature of many loans at a time when rates are only going one way. Balancing this is the evidence from surveys that M&A activity is slowing down – Deloitte’s Private Debt Deal Tracker, for example, showed European deal numbers in the second half of last year 15 percent down on the first half. But there was talk at PDI’s recent Europe Summit of some momentum starting to return to the new deals market, allowing some confidence in prospects for H2 2023. 

The last 10 years have been remarkable. The next 10 start with challenges for many types of investment, private debt included. And yet our money would be on the asset class continuing to demonstrate its obvious growth potential in the years ahead.