Private debt: Exploring the nuances

Key takeaways

In our recent Private Debt Primer, we outlined the multi-faceted growth tailwinds behind the global private debt market, which collectively underpin our year-end 2028 assets under management (AUM) forecast of $3.5 trillion (vs. $1.7 trillion as of June 2023, per Preqin). That said, the term “private debt“ is incredibly broad and encompasses a wide range of investing strategies – often with varying risk/return profiles.

For example, direct lending, which represents 46% of global AUM according to Preqin, is the largest private debt strategy. But other strategies such as distressed, special situations, and mezzanine are also sizable (Exhibit 1). Historically, fundraising patterns have varied across strategies, as investors respond to the broader macro environment (and opportunity set) at any given point in time.

In 2024, we expect some modest relief in monetary policy rates (in the U.S. and Euro Area), but nonetheless expect the high cost of capital environment will persist over (at least) the medium term. Against that backdrop, we believe dispersion across the broader private debt market will continue to play an important role. As we outline within, we see three main elements of dispersion:

1. Strategy: capital structure seniority, investment goals and situational complexity
2. Portfolio: areas of lending focus, including sector selection and company size
3. Vintage: broader macroeconomic environment, risk asset valuations, and overall opportunity set

We also expect ongoing evolution in terms and conditions. The global private debt market is now a sizable and scalable asset class, on a stand-alone basis. This has led to an expansion of the addressable market of potential borrowers and an increase in direct competition with the public financing markets.

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