Asset Owners Eye Private Markets Revival in 2024

In a year marked by economic turbulence, private debt has emerged as a beacon of stability, attracting record levels of investor interest and fund manager activity. Despite high inflation and rising interest rates, the private debt market defied expectations, showcasing its resilience and potential for growth.

Fundraising in private debt held up through the difficult conditions of 2023, with LPs remaining supportive of the asset class despite economic turbulence caused by rising interest rates and high levels of uncertainty.

Data from the Preqin Global Report 2024: Private Debt shows a record surge in funds and capital for the private debt market in 2023. The number of private debt funds reached a new high with a 19% increase to 1,080 by Q3 2023.

The report examined fundraising, AUM, and performance data, as well as responses to Preqin’s investor and manager surveys to provide insight into the private debt investment landscape.

It found newer funds are targeting significantly more capital, with a 40% increase compared to the previous year. This optimism is reflected in the ratio of targeted capital to raised capital, reaching an all-time high of 3.0x.

"2023 was a year where private debt was under the spotlight, and the asset class' results were broadly positive," said RJ Joshua, VP, Head of Private Equity, Research Insights, at Preqin. "Our results suggest that GPs are also optimistic about growth in investor demand for 2024."

Experienced managers lead the charge

The report found investors are prioritizing larger, established funds, with the top 10 players capturing over half of the fundraising. This preference was driven by the economies of scale and proven track records offered by experienced managers, according to Preqin analysts.

The average fund size for experienced managers is nearly ten times larger than that for first-time entrants.

Preqin's analysts predict a continued rise in private debt assets under management, forecasting the market to reach $2.8 trillion by 2028 — almost double the 2022 figure. They also expect the interest rate environment to stabilize, further fueling investor confidence and fundraising activity.

The outlook for other markets

The report suggested distressed debt opportunities are likely to grow in 2024, benefitting from potential economic weakness. Preqin’s analysts predict this will attract investor interest.

Mezzanine strategies are also set to gain traction as investors are likely to be attracted by the combination of reasonable safety and higher returns offered by mezzanine, compared to the balance offered by senior debt.

Business development corporations (BDCs) provide a valuable avenue for smaller investors to access the private debt market, as it is an established route for funds to attract capital.

Looking ahead

Amid economic uncertainty, private debt is proving to be a compelling investment option.

The fundraising environment is likely to continue improving in 2024 and beyond as the interest rate situation becomes more embedded in markets, with fund managers and investors alike adjusting to higher rates.

Investors are seeking the stability and higher returns offered by private debt, while fund managers are capitalizing on the opportunity by launching new funds and targeting larger pools of capital.

With experienced managers leading the charge and promising growth prospects ahead, private debt appears poised to continue its upward trajectory in the years to come.