Investors Are Backing Off From Private Debt

Fundraising for the once-booming asset class is in decline as investors anticipate the end of the market cycle.

Illustration by II

Illustration by II

The once-hot private debt sector is cooling down.

In the third quarter of 2019, private debt funds secured just $22.1 billion — the lowest quarterly haul since the first three months of 2018, according to a new report from data provider Preqin. In that case, however, the $22.1 billion fundraise for that quarter followed 2017’s blockbuster fourth quarter, which recorded $54.4 billion in capital commitments. This time, the quarter’s fundraising stats are the continuation of an ongoing decline for the asset class.

So far this year, private debt funds have raised about $75.5 billion, well below the nearly $91 billion committed to the asset class by this time last year. Preqin attributed the ongoing decline in fundraising to the widespread belief that markets are nearing the end of the current cycle.

“Competition for lending opportunities remains a pressing concern for investors as the market continues to mature,” the report stated. “Fund managers across private capital are bracing themselves for more uncertainty, especially those in the private debt space, an asset class that has not yet faced a true market downturn.”

[II Deep Dive: First-Time Private Debt Managers Struggle to Raise Money]

Insurance companies, some of the largest investors in the credit markets, are among those expecting the market to turn, according to a separate report from Cerulli Associates. Insurers surveyed by Cerulli said they viewed the late stage of the credit cycle as “very concerning,” as compared to other issues like liquidity and market volatility.

However, the need to produce yield at a time when interest rates are low means that insurers are still eyeing new investments in private debt, despite their concerns, according to Cerulli. Sixty-four percent of insurance investors surveyed by the research firm planned to increase their allocations to private debt within the next year.

“Insurers are weighing their options,” Cerulli director Alexi Maravel said in a statement. “They are under more pressure than ever to meet income or book yield goals as long-term rates persist unabated and investment income plays a larger role in profitability.”

According to Preqin, there are now 417 private debt funds in the market seeking to raise a total of $177 billion.

“Both figures remain very high compared with historical totals and could lead to a strong fundraising finish to the year after a relatively disappointing 2019 so far,” the Preqin report noted.