Private debt can deliver a reliable income stream in a volatile market, making it an appealing asset class to investors today. The relatively solid performance shown by private debt funds in the second half of last year could inspire even more confidence in the category.
“One of the key attractions of private credit is the certainty of returns that the trio of seniority, contractual cash flows and negotiated downside protection—native to most private credit strategies—can deliver,” said Roger Li, managing director and co-head of GP advisory at Briarcliffe Credit Partners, in an email to PitchBook.
“While large upside surprises are rare in credit (with the potential exception of distressed credit), so, too, are large downside surprises, which is a trade-off credit investors are very willing to accept,” he said.
Private debt funds—encompassing direct lending, distressed debt and mezzanine financing—achieved a one-year IRR of 5.3% through Q3 2022, according to PitchBook’s most recent Global Fund Performance Report. Compared to the 19.6% decline over the same period for the MSCI World Index, which tracks stocks in developed markets, private debt outperformed by a significant margin.
Preliminary data shows the strategy posted a 0.4% gain in Q4 2022, placing it on par with real estate as the third-best-performing private capital strategy. In comparison, private equity and venture capital registered quarterly returns of negative 0.2% and negative 0.8%, respectively.
An increased demand for debt financing due to tightened lending conditions also increased opportunities for private debt managers, who may deploy capital for their current vintage of funds at a faster pace.
One example is Corbin Capital, a New York-based asset manager with $8.3 billion in assets across private debt, opportunistic credit and hedge fund strategies.
In April 2022, the firm held a $200 million first close on Corbin Private Credit Manager Fund II, a closed-end fund dedicated to private debt investments across corporate lending and asset-backed lending, according to a person familiar with the matter.
In anticipation of the growing opportunity set, the firm now expects to fully invest the raised capital by 2024, a year or two ahead of schedule, the person said.
The retreat of bank lending has created space for the growth of private-market loans in recent months. Private debt funds financed 46 leveraged buyouts from Oct. 1 to Dec. 8, while only one deal was financed in the broadly syndicated loan market during the same period, according to PitchBook LCD data.
Opportunities for other private credit strategies are also on the rise. Mezzanine financing, for instance, is becoming more prevalent in recent months as a result of shrinking access to senior debt.
More money managers are dipping their toes into private lending now, said Jason Meklinsky, the chief revenue and strategy officer at Socium Fund Services, a fund administration firm.
TPG is acquiring credit and real estate specialist Angelo Gordon for $2.7 billion in a renewed push into the private debt market. Other investors, such as Mubadala and PGIM, also bought credit managers in recent months.
“The entrance to the private credit market is far smaller than the average layperson would have imagined,” Meklinsky said. “We’re seeing people raising $100 million to $125 million to lend in the private markets.”
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