From being a relative niche within the investment landscape, private debt -- and direct lending especially -- has gained increased favour among asset owners in the current higher interest rate environment.
That trend is likely to continue, according to two recently released reports by Preqin.
In its Future of Alternatives 2028 report, the private markets data provider forecasts that private debt's assets under management (AUM) globally will grow at a compound annual growth rate (CAGR) of 11.1% to hit an all-time high of $2.8 trillion by 2028.
That figure is almost double of private debt's AUM in 2022.
Another, shorter-term outlook report, the Preqin Investor Outlook: Alternative Assets, H2 2023, said demand for private debt investments remains solid, despite difficulties for the overall global economy.
That trend is broadly true of demand for private debt in Asia as well,where the longer-term outlook seems more positive, despite some insurers and family offices telling AsianInvestor that they have turned wary about private market investing.
About 90.9% of respondents based in Asia Pacific said private debt met or exceeded their expectations, according to Henry Lam, associate vice president for research insights at Preqin.
He added that these investors primarily invest outside their own region.
“APAC is a relatively small market for private debt. APAC investors who include private debt in their portfolio are exposed to North America and Europe as well,” Lam told AsianInvestor.
Asia Pacific accounts for 5.5% of global private debt AUM.
One of the new asset owners heading into private debt is Kumpulan Wang Persaraan (KWAP), Malaysia’s federal employees’ pension fund.
"In the last eight months, we have been educating ourselves on the subject, meeting major global private credit GPs (general partners),” Hazman Hilmi Sallahuddin, chief investment officer at KWAP, told AsianInvestor earlier in October.
Private debt is the only unlisted asset class which is expected to deliver improved returns over the next year, according to most asset owners, the H2 2023 outlook report noted.
Most respondents to Preqin's global survey also said they intend to increase their allocations over the longer term.
Private debt performance is expected to be stronger than in the past, thanks in part to a positive outlook for distressed debt strategies.
Its internal rate of return (IRR) was 9.11% between 2016 and 2022. Preqin predicts the private debt will return an average 9.81%, from 2022 to 2028.
Preqin’s model for the 2028 outlook report extrapolates using data from 2019 to 2022, during which private debt AUM grew at 21.3%.
There may be further upside to this forecast if banks continue to be cautious in extending loans.
Breaking down the projected growth numbers per region, private debt AUM targeting North America is expected to increase substantially, from $1 trillion in 2023 to $1.7 trillion by the end of 2028.
With the US being the most mature private debt market, this is also where KWAP will likely make its first investment, its CIO said.
“We hope to be able to do at least one private credit deal before the end of this year, but because it is new territory for us, we are going to invest first in an established private credit fund,” Sallahuddin explained.
Meanwhile, AUM targeting Europe is forecast to grow at 14% over the same period to $900 billion by 2028, showing the market demand for funding amid more challenging financial market conditions.
Lam said that unlike North America and Europe, some major Asian economies in such as China and Japan have reduced or maintained their interest rates at a low level.
The CAGR for Asia Pacific's private debt market is expected to be about 4.6% until 2028, with AUM targeted to reach $106 billion.
"There is still great room for APAC markets to develop so that it can be as noticeable for global investors as North America and Europe," Lam said.