Private Debt Is Growing and So Are Opportunities 

Private debt has grown over the past decade as a portion of the overall credit market and now makes up a significant part of corporate financial activity. Investor opportunities in this arena are also increasing, but risks remain. 

Distinct from public corporate-bond markets, private debt has existed for centuries. Like private equity, private debt is a broad description of privately structured debt capital. Subsectors include direct lending, distressed debt, mezzanine debt and others.  

Private debt represents over $1.6 trillion in assets under management in 2023, compared with $300 billion prior to the 2008 financial crises. This growth has mirrored the increase in banking regulations following the crisis. Bank lending and bank syndicated loans have declined as an overall portion of debt finance, and corporate lending has increasingly migrated out of the banking sector. Corporate bond markets, including both investment grade and high yield, provide access to credit via publicly tradable markets. Increasingly, these bond markets serve larger companies, leaving small and mid size businesses to seek debt capital elsewhere. Much of this void is being filled by private credit.  

Lending strategies can range from senior secured structures to subordinated, unsecured credit. That means risks can vary widely, depending on the strategy and terms such as yield, covenants and payoff dates. However, private debt allows for a single source of lending that can be tailored and responsive to unique situations and provide greater surety of closing for issuers. Yields are often based on floating rate structures, making it an attractive option for investors in a rising-rate environment.  

Private debt is generally illiquid, meaning investors should be prepared for a hold to maturity, and transparency may be limited depending on how terms are set. Corporate leverage levels are generally to be negotiated between borrower and lender, thereby relying on the discipline of lender to manage risk.  

As the asset class broadens and more investors participate, these risks could become more pronounced. The key will be the diligence performed on private debt lenders and their ability to do their underwriting and establish covenants and oversight of credit investments.