What is Private Debt?
The term private debt refers to lending, largely to corporations and small businesses, that is done outside of the traditional channels of bank lending and the public (syndicated) debt markets. The broad term of “private debt” encapsulates a wide range of strategies such as direct lending, which is the largest by Assets Under Management, the term also includes distressed, opportunistic, mezzanine and venture capital.
At $1.6trn in AUM globally, Private Debt (excluding real estate) has already cemented its status as a sizeable and scalable asset class for a wide range of long-term investors. It represents a modest 12% of the wider alternative asset classes, which totalled $13trn as of March 2023.
Research shows the global private debt market will reach $3.5 trillion in AUM by the end of 2028.
The drivers of this growth in the private debt sector are multifaceted and include:
- Borrower Preferences
For customised funding solutions, certainty of execution and the flexibility inherent in a long-term borrower/lender relationship.
- Investor Preferences
For diversification in the context of portfolio allocation, with multiple opportunities to introduce capital structure protections.
- Structural moves in markets
These are now serving much larger borrowers, leaving public debt market deal sizes prohibitively large for most middle market companies.
- Contraction in bank credit
As the contraction continues, we expect this will allow for a further expansion of the private debt’s addressable market of borrowers.
Why invest through Private Debt?
We are dedicated to creating capital solutions in Private Debt; where our research shows that:
- Banks lend much less than before to small and medium sized companies, limiting their scope to large structures which means banks miss opportunities. Private credit fills this gap, but SMEs are price takers, which means they must accept paying a much higher yield.
- Large financial institutions are subject to Basel III (2010), which requires higher capital reserves and liquidity requirements.
- The Dodd Frank Act (2010) has put restrictions on banks investment activities while increasing compliance costs, which are depreciating banks’ interest in small businesses.
- The
Volcker (2014) rule prohibits banks from conducting certain investment activities with private equity firms, hedge funds and with their own accounts.
- Private Debt vs Returns
Investments in private debt with lower liquidity tend to offer higher returns.
- Private Debt vs Risk
Private assets have higher expected returns, compared to traditional asset classes with similar risk profiles.
- Private Debt vs
Private Equity
Our private debt strategies have similar expected returns and much better liquidity than private equity.
- Private Debt vs
Economic Cycle
Our Private Debt asset classes generate a substantial positive performance regardless of the economic cycle.
We deploy capital into the most liquid areas within Private Debt where we have:
- Protection
Our Private Debt structures come with capital protection using collaterals, guarantees and insurance.
- Liquidity
Private debt is more liquid than private equity, with an investment duration of up to one-year.
- Predictability
Our Private debt structures generates predictable positive performance with minimal volatility irrespective of the current economic cycle.
- Yield
Private debt generates yields highly superior to bonds of the same level of risk, irrespective of the current economic cycle.