Private debt, according to Preqin’s Global Private Debt Report, “is uniquely positioned for both reliable income and risk-adjusted returns,” particularly given its decades of strong and consistent growth averaging 13.5% annually.[1] Preqin now estimates in its Future of Alternatives in 2027, that private debt will grow by 10.8% in the next five years.[2]
Earlier this fall, we attended SuperReturn North America in New York, where current market conditions, portfolio diversification, and the growth in private debt or credit were the primary topics of conversation on the agenda. According to conference participants, rising inflation and geopolitical influences are the critical factors in this transition from the relatively calm, multi-decade bull market, to a time characterized by uncertainty and ambiguity.
Portfolio diversification for private markets
During the conference, many sessions discussed strategy and portfolio diversification as a means to generate alpha. A few participants argued for investing in technology as an asset class to drive growth; these investors see software as a strategic investment that is able to thrive on uncertainty, similar to private debt. Moreover, it was noted that one-third of all technology startups have incorporated debt into their fundraising rounds. Throughout the event, participants highlighted other key asset classes that are growing within private markets, including:
- Private debt: is a strategic way for PCOs/VCs to bridge between funding rounds and avoid down-rounds, or having to mark down valuation, this strategy benefits both GPs and LPs
- Distressed investing: A few firms are tapping into distressed investing; this means they are buying the debt from good companies they like and securitizing it
- Evergreen fund structures: This is a structure where the investors are fully invested in the fund on day one; these are increasing in popularity in both continuation funds, as well as in the private equity secondaries market
- Direct lending: This is a strategy that is successful across a number of scenarios, particularly given market current conditions
The private credit outlook in uncertain times
A recent whitepaper, The Golden Age of Private Credit? Opportunity in Uncertain Times highlights rapidly rising interest rates, recessionary fears, and geopolitical uncertainty impacting the performance of traditional assets. It discusses the many attractions of private credit to investors, namely how it’s a higher-yield alternative to public debt markets, with relatively low volatility. However, the outlook is not all rosy. The surge in fund launches and capital, has heighted competition in the space. This puts downward pressure on yields and covenant safeguards. Moreover, as the economic environment begins to sour and inflation continues to rise, conditions could become stickier.
Operational Challenges
Private credit managers, especially those with expertise and a track record in distressed debt and special situations, are well-placed to take advantage of all these opportunities, particularly those mentioned at the conference. Yet, investing acumen is only part of the equation. Firms also need an operational infrastructure that can account for increasingly complex fund structures and investment strategies, with a level of automation to support escalating transaction volumes and manage risk. Strong operational support will be a major differentiator for fund managers.
In an era of rising public market volatility and pronounced downside risk, private credit is proving to be one of the more resilient sectors of the investment landscape. As highlighted at the conference and in this whitepaper, fund managers that have the right operational underpinnings will be better positioned to take advantage of the unusual opportunities these uncertain times present.
To read more about the opportunities available within private credit, download the whitepaper The Golden Age of Private Credit? Opportunity in Uncertain Times. For more on SS&C Advent Geneva® and how it supports fund managers as they diversify strategies to include private markets, visit our website, or request a demo today.
[1]2022 Preqin Global Private Debt Report. (2022, January 12). Retrieved from: https://www.preqin.com/insights/global-reports/2022-preqin-global-private-debt-report
[2]Thrasher, M. Pensions & Investments. Global alternatives market projected to double in size by 2027 – Preqin. October 5, 2022. https://www.pionline.com/alternatives/global-alternatives-market-projected-double-size-2027-preqin
