Private Debt Funds Offer Attractive Yield
The great financial crisis triggered a tightening of banking regulation, which made loans to middle market companies unattractive for banks, shutting out most small- and mid-size companies from the banking market. In addition, the 2010 enactment of the Dodd-Frank Act made it increasingly expensive for small banks to operate, cutting off their supply of loans to small and mid-size companies. Private debt funds and collateralized loan obligation funds (CLOs) are two of the major types of non-bank intermediaries that stepped in to fill the gap.
Preqin, the foremost provider of data for the alternative asset community, estimated that at the end of 2021 private credit had about $850 billion in assets, behind the $4.4 trillion invested in private equity. Despite this large and increasing size in the U.S. and Europe, there is relatively little research on the private debt market, particularly compared to the bank and syndicated loan markets. The lack of information motivated Jorn Block, Young Soo Jang, Steven Kaplan and Anna Schulze to survey U.S. and European investors, primarily direct lending funds: 38 U.S. funds with assets of $136 billion and 153 European funds with assets of €180 billion (a combined total of more than one-third of Preqin’s estimate of the total market). The survey was conducted over the period August-September 2021. They asked the general partners (GPs) how they sourced, selected and evaluated deals, how they think of private debt relative to bank and syndicated loan financing, how they monitored their investments, how they interacted with private equity (PE) sponsors and how they viewed the future of the market.
They began by noting: “While there is no standard definition of private debt, we refer to private debt funds as investors that raise capital commitments through closed-end funds (like private equity) and make senior loans (like banks) directly to, mostly, middle-market firms. CLOs, in contrast, invest in syndicated loans that are typically arranged by a large commercial bank.”