• Continued fund-raising growth: 2021 was another record fundraising year for private debt funds, with $193 billion raised across all sub-strategies globally¹  (+10.4% y-o-y), marking a tenth consecutive annual growth. To be sure, amid the outbreak of the pandemic in 2020, private debt was the only private market asset class that posted growth in fundraising.
  
  
• Megafunds have supported larger deals: Continued volume growth in fundraising is driven by rising Limited Partner (LP) allocations on the demand side and launch of ‘megafunds’ on the supply side. As we have mentioned, over the past two years, five funds raised $10 billion+ each, as against only one fund over the previous decade.
  
  
• Market consolidation underway: The market is consolidating as the top end of the market is growing faster than the tail end. The top 10 private debt funds accounted for 40% of total fundraising in 2021 vs. 27% in 2016.
  
  
• Diverse sub-strategies contributing to consistent growth: While direct lending continues to dominate the private debt market, growth over the past 2-3 years has come from expansion into distressed and special situations strategies, especially because of pandemic-related market dislocations.
  
  
• Bespoke financing solutions rising: Private debt managers are seeking to differentiate by offering borrowers a range of bespoke financing solutions. For e.g., having found it difficult to deploy capital amid the economic recovery following the pandemic, distressed managers are increasingly investing in non-distressed opportunities. Mezzanine managers are financing deals outside their core lending as well, owing to increase of unitranche loans and tightening spreads.
  
  

¹ Source: Preqin. Excludes secondaries, FoFs, and co-investment vehicles to avoid double counting of capital raising

Amid the buoyant trajectory and shift in focus, we must not lose sight of macro and regulatory hurdles on the horizon:
 

• Inflation, interest rate and floating-rate conundrum: The floating-rate nature of direct lending and significant spread cushions inflation and interest-rate risks. However, we worry if the end-borrower will be able to absorb incremental inflationary costs and higher interest payments amid slowing economic growth.
  
  
• Evolving regulatory landscape: The private debt market has been traditionally shielded from regulatory oversight, given paucity of data and transparency issues. That said, times are changing – we anticipate increased regulatory scrutiny hereon. Indeed, we are already seeing EU countries implementing new regulations within the Alternative Investment Fund Managers Directive (AIFMD) framework to harmonize the EU regulatory framework for “loan origination” or Private debt funds.
  
  
• ESG comes with integration challenges: We expect ESG to be a key differentiator for private credit funds. Nearly 87% of the private debt fund-raising²  over 2021 to 2025 in the Europe is forecast to be driven by ESG oversight.  However, integrating new regulations will have its own challenges, in terms of missing data and disparate standards/criteria. Here, managers will need to undertake concerted efforts to incorporate ESG criteria into loan documents and margin ratchet features.

Therefore, it is time to reset, readjust and refocus strategies and solutions.

But are managers ready?
 

Going by conversations with market participants, we realize that the asset class is well-positioned to take advantage of the post-pandemic recovery.

Nearly 91% of investors³  intend to maintain or increase allocations to private debt over the long term – the asset class is projected to grow at 17% CAGR to $2.7 trillion by 2026⁴ . While direct lending will be the largest contributor, there is significant scope for newer strategies in areas such as distressed, special situations, and venture debt.

Against this backdrop, CRISIL organized a webinar, titled ‘Alternative credit at a crossroads: Time to reset, readjust, and refocus’ on 31^st May 2022, where experts deliberated the different aspects of the industry. The webinar discussion focused on strategies, and solutions that market participants could adopt to successfully navigate the next growth cycle. To read the summary insights and recorded webinar on our website, please click on link.

² Source: PwC Market Research Centre, Preqin
³ Source: Preqin
⁴ 2022 Preqin Global Private Debt Report