PitchBook’s data for the report shows that, in this fertile decade up to 2022, venture capital (“VC”) providers were the most prolific investors in this asset class, far outstripping private debt and private equity firms, and amassing well over $5trn in amounts invested by the end of 2022.
A material increase in the number of non-traditional participants was one of the key drivers of deal value and deal volume in the VC space.
Our report shows that deal volumes involving these new players, comprising hedge funds, mutual funds, and other asset managers that don’t normally have a mandate to support start-ups, increased from just under 15,000 in 2020 to just over 22,100 in 2021. Deal count for these transactions levelled out at a little over 19,200 in 2022.
After VC, private equity managers were the next most active investors between 2012 and 2022. They raised over $2trn globally just in the period from 2019 to 2022. Our report finds that, with leverage, the total purchasing power of those funds is estimated at above $5trn.
The drivers
Economic and regulatory forces, which took effect just as the banks were reigning in their risk appetites after 2008, have contributed to private debt’s sustained growth.
Higher capital adequacy rules contributed to the banks’ general retrenchment, including from some of the larger buyout deals, leaving businesses to turn to direct lending or private equity options.
When interest rates reached their nadir, high yields from private debt likely appealed to investors, and the resilience of this asset class during market cycles may have marked it out as a tool for diversification. When corporate bond spreads were compressed in that prolonged low-interest rate environment, investors sought private debt alternatives to corporate fixed-income portfolios.
Even as interest rates began to climb, the floating rate exposure that can be gained through private debt likely attracted more players.
Private investors have also been active since 2010 in snapping up opportunities in the distressed debt space, as the various supporting mechanisms that were propping up struggling companies expired.
As our report notes, blue chip investors such as Blackstone, KKR, and Ares formed teams and funds to get into the private debt market, as this asset class matured.
Private debt’s prospects
The back end of 2023 has seen a range of indicators pointing to prospects for private debt to continue to soar over the next four to five years.
A recent Preqin report on alternative assets (Preqin, 2023), which includes the firm’s latest five-year outlook for private capital, projects this market to nearly double in size to $2.8trn during the next four years.
A separate study from Apollo Global Management (Slok et al., 2023), which also uses PitchBook data, shows that the current level of dry powder in private debt is in the range of $400bn.
These studies illustrate a potential trajectory of total deal values, but we are expecting several trends to reshape private debt in the coming years.
Direct lending, infrastructure debt, and bespoke lending strategies have become increasingly popular, even as broader private equity fundraising levels have struggled.
We are also seeing the emergence of new investment vehicles for real estate, with a greater focus on niche real estate segments. We have also witnessed the game-changing impact of special purpose acquisition company (“SPAC”) vehicles as a means to go public, though it remains to be seen if the volumes of SPACs will be maintained in 2024.
The proliferation of environmental, social, and governance (“ESG”) investing will continue in private debt, although the pursuit of long-term sustainability goals is clashing with the allure of immediate profits.
Amid all this, the rise of automation and artificial intelligence has created opportunities and challenges, while the demand to produce granular reporting on ESG and other vital information will persist.
Download the report to see our full conclusions and findings.
