Investors in private debt funds, whose primary underlying assets are leveraged non-bank loans for businesses, fared extremely well in 2023. Such loans gained 13.3% for the year, according to the US Morningstar LSTA Index.
It was the greatest annual return for such funds since the global financial crisis in 2008 and the second-strongest ever, said PitchBook, which recently published its 2023 Global Private Debt Report.
The equivalent European index was up a nearly identical 13.4%.
Despite the strong returns, private debt fundraising in the traditional institution fell off to an estimated $76.7 billion in the second half of 2023, compared with $112.6 billion in the first half. Demand for private debt was “siphoned off by a rebound in more liquid alternatives with comparable yields,” such as semi-liquid funds for retail and separately managed accounts for insurers, according to the report.
Such alternatives accounted for one-third of gross inflows at the top seven U.S.-listed private market managers and nearly half of all fundraising for credit, the report said.
Pitchbook said it’s not yet certain that “when the dust settles” — i.e. after late-reporting funds finish trickling in — institutional channel investments will reach $200 billion for a fourth consecutive year.
Still, the report noted, private debt has surpassed venture capital as the second-largest private capital strategy in terms of annual fundraising, trailing only private equity. Just 10 years earlier, in 2013, only $97.6 billion in capital was committed to private debt vehicles.
In fact, in what PitchBook described as “quite the plot twist,” there were many more private credit IPOs in 2023 than private equity IPOs.
“2023 was a great test for private debt, and it passed with flying colors,” said Jamal Hagler, vice president of research for the American Investment Council (AIC), an advocacy organization for the private debt industry that sponsored the PitchBook study.
Leveraged loans generally are floating-rate loans extended to businesses that either have a poor credit history or already hold debt on their books. The loans are riskier than traditional loans and thus typically carry high interest rates.
When the Federal Reserve began raising interest rates in 2022, some observers predicted a host of borrowers — particularly those with private debt — would default, Hagler noted. “Those predictions of doom have not come true,” he said.
Hagler added that “the importance of private debt has come into focus over the last year and a half as rising interest rates, the regional bank crisis and considerable distress in the commercial real estate sector have constrained the ability of traditional lenders to extend credit.”
Direct lending continues to be the leading sub-strategy in private debt, accounting for 31.8% of the overall mix of funds that closed in 2023, according to Pitchbook. The report defined direct lending generally as “senior loans made to middle-market companies without the use of an intermediary but may include revolving credit lines and second-lien loans.”