Private Debt Markets Are Proving Resilient

Private Debt Markets Are Proving Resilient

Global research and data group, Preqin, has released its Future of Alternatives 2027 report, which shows that private capital invested is set to double by 2027, while retail interest in alternatives is predicted to fuel the next wave of industry growth.

Despite a challenging macroeconomic outlook, demand for private capital continues to show resilience, with total global assets under management (AUM) expected to almost double to US$18.3tn by the end of 2027, from US$9.3tn at the end of 2021. While the compound annual growth rate is expected to slow compared to recent years (to 11.9% annually between 2021-2027, from 14.9% between 2015-2021), investor demand remains strong as investors continue to seek alternative sources of returns in an uncertain economic environment.

Preqin expects growing retail investor interest in private investments – especially among high-net-worth investors – to be one of the key drivers of private markets growth in the future, particularly as a higher portion of institutional investors are approaching their current target allocation to alternative assets and may be forced to revise their target based on market conditions.

Christoph Knaack, CEO of Preqin, said: “We expect to see more sustained growth in the asset classes which have historically performed well in more volatile markets, and which are able to provide inflation protection, such as infrastructure, natural resources, and private debt. Continued demand for these asset classes, coupled with a growth of retail investor interest in building allocations to alternatives, will drive private capital AUM to new heights over the next five years.”

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Venture capital is the fastest growing asset class: Preqin forecast +19.1% growth per year, from US$1.46tn end-2021 to US$4.17tn by 2027, followed by infrastructure (+13.3%), and private debt (+10.8%).

A more challenging outlook is expected for real estate, with rising interest rates and inflationary concerns slowing expected AUM growth to 8.4% per year.

Strong annual performance is expected to be one of the drivers of AUM growth across VC markets, with the asset class expected to return +14.6% annually from 2021-2027. This comes despite headwinds from a deteriorating macro environment, which is expected to hit current valuations, reduce the number and value of exits, and increase the cost of capital.

Private debt markets are proving resilient against a tough backdrop of weaker macroeconomic fundamentals, with a forecasted AUM growth of 10.8% annually. This is largely due to the prevalence of floating rate exposure in direct lending compared to traditional fixed-income products, building in some resiliency and inflation protection for investors. With US dollar strength and increased interest rates on offer, international investors are expected to flock to North America for private debt opportunities, given it remains the home of the world’s foremost reserve currency.

Infrastructure is forecasted to perform strongly with a predicted 13.3% of annual growth in AUM (reaching US$1.88trn of assets by 2027), closing the gap to real estate in AUM terms – rising from 76% of real estate AUM in 2021 to 88% in 2027. European infrastructure is expected to lead the way, with AUM annual growth of 17.8%, reflecting the region’s growing need to invest in energy generation capacity, reducing a reliance on Russian supplies.

Other findings from the Preqin Future of Alternatives 2027 report include:

  • Hedge funds: Hedge funds are bottom of the AUM growth table, with 3.45% annual growth forecasted from H1 2022 to 2027. This year has been challenging for the hedge fund industry resulting in a forecasted decline in AUM in the short run, but a recovery is expected over the next few years.
  • Private equity: Global private equity fundraising is expected to see modest growth over the period following declines of 21% and 3% in 2022 and 2023 respectively, while performance is expected to soften compared to that seen in recent years, as macro-economic factors have deteriorated significantly.
  • Natural resources: Investor demand for natural resources will continue to grow as the global energy crisis continues and the prospect of a fresh commodity super cycle boosts the recovery of the asset class, with predicted AUM growth of 6.2%, to reach $297bn by the end of 2027.