Business is booming.

Private debt funds: cautious banks are fuelling their growth

110


Once a niche area of the global asset management industry, private debt funds have emerged as a growing sector for credit investors seeking yield.

The funds, run by the likes of Blackstone, Apollo, Carlyle and KKR, make direct loans to small and midsize companies with limited market access. In extending loans, private equity funds are elbowing out banks which have turned leery following the financial crisis and, more recently, the pandemic.

S&P Global estimates that the global private debt market grew tenfold in a decade to $412bn at end-2020. Assets parked in private credit funds have more than doubled over the past five years to hit a record $1.1tn last March, according to Preqin. The first 11 months of 2021 alone saw some 190 private credit funds raising a record $181bn.

Behind the demand are two drivers: persistently low rates and falling returns in even the riskiest part of the traditional debt market. The spreads in yield offered by riskier corporate bonds over US Treasuries hit a fresh low last summer.

Private debt provides higher fixed rate returns than public deals as investors are parking their money for a long time in lower liquidity debt. This so-called “illiquidity premium” for private debt has gained appeal among yield hungry institutional investors.

The focus on smaller companies means direct lenders are often the only creditors, giving them more control over terms. That builds in two advantages: mitigating risks from defaults and remaining in pole position if they occur.

Scalability and returns are the big issues as more investors enter the private-credit world. Are there enough suitable small to medium-size borrowers to absorb all the cash looking for a home? And will the flood of money push down yields? Less stringent lending standards could mean a reckoning in the next couple of years. The sell-off in junk bonds in November should make private debt fund investors nervous.

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