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Digital transformation of technologies, processes and data analytics.
Fueled by excellent performance, fundraising in private markets continues to gather momentum. Private debt assets have now surpassed $1.6 trillion as investors piled into the strategy. Private debt managers are strengthening their operations through a digital transformation of technologies, processes, and data analytics. Broadridge looks at what the coming year might hold for the private debt industry.
Private debt funds now look after $1.6 trillion in AUM (assets under management) – a new record, while the asset class has already accumulated another $93 billion year-to-date in 2022. According to Preqin, 56% of investors plan to commit to direct lending strategies over the next 12 months, with 48% looking at mezzanine products and 43% distressed debt. Investors see private debt as being a safer alternative to other assets, most notably equities and bonds. As private debt loans are mostly floating rate, the asset class is also well protected against rising interest rates and inflationary risk. With investors looking to obtain decent returns and diversify their risk, private debt is likely to be one of the major beneficiaries.
Of the $10.3 trillion invested in private capital, Preqin calculates around $4.37 trillion is managed by firms committed to ESG (environment, social, governance). Preqin continues that private debt has one of the highest amounts of ESG commitments of any asset class, with 39% of its AuM committed to ESG. This comes as investors and regulators increasingly insist that asset managers – including private debt – integrate ESG into their strategies. Many are already doing so with special situations, and distressed debt managers are now inserting ESG requirements and clauses into their borrower credit terms. Accordingly, ESG adoption is only going to accelerate in private debt circles. However, the industry does need to be careful to avoid greenwashing, especially as the US Securities and Exchange Commission (SEC) is starting to fine money managers for transgressions in this area.
The COVID-19 crisis and the following volatility have reinforced the importance of diversification. With alternative asset managers looking to diversify their distribution footprint, many private debt funds are branching out and launching hedge fund and private equity strategies. The same is true for hedge funds and private equity, many of whom are taking a plunge and developing private debt products. As such, managers will need to work with multi-asset class service providers who can support a wide range of strategies. This trend towards diversification is likely to continue in the coming year.
Private debt firms have been automating their operations for some time now, having previously been reliant on manual processing. Not only is automation generating cost efficiencies, but it is also eliminating duplication and errors. Similarly, the industry is also making better use of data and using it to strengthen investment decision-making, risk analysis and reporting activities. This growing appetite for automation and increased adoption of new technologies will be a common theme for private debt.
Private equity managers are bypassing banks and going directly to private credit funds to obtain financing for deals. A Dechert report said 45% of private equity firms have increased their use of private credit financing in buyouts. Many private equity firms note that borrowing from private credit funds is a more seamless process than soliciting financing from banks. As the borrowing process is much easier, deals can be executed incredibly quickly. In addition, private credit funds are also reportedly offering private equity borrowers more leverage than what they would receive from a bank. As such, private credit funding of private equity transactions will certainly intensify next year.
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