Investors continue to flock into US private debt: Pitchbook
PRIVATE debt continued to attract robust inflows from institutional investors in the first half of 2023 with the North American market strengthening its dominance, data provider Pitchbook said in a report released on Tuesday (Sep 27).
Activity holding up is good news for the private credit industry, which flourished after the 2008 financial crisis as capital-constrained banks cut lending, but faces a reality check as a looming recession and higher interest rates squeeze companies’ earnings and their ability to service higher borrowing costs.
Global investors’ pledges to put money into private debt funds reached US$94.9 billion in the first half of 2023, surpassing the US$91.4 billion raised during the same period last year, the data showed.
This suggests 2023 is on track to be the fourth year in a row with commitments to private debt exceeding US$200 billion, the report noted.
Fundraising in North America, which accounts for the vast majority of private debt funding globally, furthered its lead, now accounting for 75.4 per cent of global activity, up from 69.6 per cent for the whole of 2022, the data showed.
The market share in Europe, where economic growth is expected to trail the US, was flat, with lenders raising US$21.2 billion of new funds, or 22.3 per cent of the first half’s total activity, compared to 23 per cent for the whole of 2022.
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Asia’s market share meanwhile fell sharply, to just 1.6 per cent of total fundraising in the first half of the year, down from 6.8 per cent for the whole of last year.
Direct lending, whereby funds provide financing directly to smaller and private equity-backed businesses, continued to account for the largest share of private debt funds, at 32 per cent of total fundraising, the report said.
A riskier type of financing that sits between senior debt and equity known as mezzanine debt made a strong comeback, attracting 27.9 per cent of fundraising, compared to 12.3 per cent on average over the past five years.
It gives borrowers the option not to pay interest on the debt until maturity and preserve cash flow, an advantage at a time when funding costs are rising.
But distressed strategies fell out of favour, accounting for just 2.3 per cent of fund closings in the first half, whereas special credit situations, a similar asset class, attracted 22.3 per cent of total fundraising.
Private debt funds are also increasingly venturing into asset-backed finance, their latest effort to grab market share from banks, the report said. REUTERS
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