Private debt and direct lending funds are seeing high demand but greater challenges

By Daniel Lanyon on 16th March 2018

Alternative Credit

Research by Preqin has found high valuations top concern for private debt fund managers.

Private debt and direct lending funds are seeing high demand but greater challenges

Research by Preqin has found high valuations are the top concern for private debt fund managers.

Non-bank lending has been one of the most vibrant areas of finance for some time with demand for attractively yielding assets prompting huge demand for specialist private debt/credit funds.

As the private debt industry has matured, however, issues that have historically affected other alternative asset classes – high valuations and increased competition for transactions – are become increasingly prominent concerns, according to a recent survey from Preqin based on a survey of 94 private debt fund managers conducted in November 2017.

More than three-quarters of private debt fund managers feel that institutional investor appetite has increased for alternative credit assets in 2017. Nonetheless, fund managers are somewhat nervous with one in two pointing to valuations as their major concern for the market.  Fund managers also report increased competition for transactions: 70 per cent believe there is more competition for deal-making opportunities, while none report that there is less competition.

As a result, a significant proportion (45 per cent) of fund managers report increased difficulty in finding attractive investment opportunities compared to 12 months ago. Just 3 per cent feel that it has become easier. A further 37 per cent cite deal flow as a major concern.

Tom Carr, head of private debt products says while the private debt industry saw huge growth in 2017 the maturation of industry is bringing up fresh challenges that more established asset classes have suffered from.

“Despite the increasingly challenging private debt environment, though, fund managers are optimistic for the future of the industry. The vast majority of private debt fund managers have seen an increase in investor appetite over the past year, and most are looking to deploy more capital in 2018 than they did in 2017.”

“In fact, almost all fund managers expect industry assets under management to increase in 2018 again, signalling that fundraising confidence is far from waning.” 

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