PREQIN

QUARTERLY UPDATE:
PRIVATE DEBT
Q3 2019
Insight on the quarter from the leading provider
of alternative assets data

Fundraising
Funds in Market
Investors
Performance
Dry Powder
PREQIN QUARTERLY UPDATE: PRIVATE DEBT Q3 2019

Foreword

Private debt fundraising in Q3 continued at the outperform both natural resources and real estate.
lacklustre levels that have characterized 2019 so Amid ongoing economic turbulence, the asset class is
far. Notably, twice as many funds were closed in the proving its ability to provide a sustainable and reliable
corresponding quarter in 2018. That said, the levels of income stream to investors, and therefore protection
capital raised each quarter are somewhat consistent on the downside.
in this environment, where competition for lending
opportunities remains a pressing concern for investors As increasing levels of capital are being put to work
as the market continues to mature. by fund managers, investors are hoping the more
experienced managers can guide them through
Manager sentiment remains buoyant as future the turbulence. Although the debate continues, the
searches and mandates issued by investors in the consensus is that we are in the late stage of the market
quarter are up from Q3 last year. The need for a cycle. As a result, fund managers across private capital
diversified portfolio is greater than ever as geopolitical are bracing themselves for more uncertainty, especially
tensions intensify, producing persistently low interest those in the private debt space, an asset class that has
rates and unattractively low yields on traditional fixed not yet faced a true market downturn.
income assets.

Although returns for the asset class have slowed over

the past year, with direct lending funds contributing
directly to the slump, private debt has continued to

Contents
3 Sponsored Lending Today: Competition, Tight 5 Funds in Market
Spreads and Loosening Provisions – Darius 6 Investors
Mozaffarian, White Oak Global Advisors, LLC
7 Performance & Dry Powder
4 Fundraising

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2
Sponsored Lending
Today: Competition,
Tight Spreads and
Loosening Provisions
Differentiation is key to success as sponsored lending market matures
After a decade of strong investment returns, fuelled by
easy monetary policy and a recovering global economy,
investors today face the issue of where and what to
invest in during a late-cycle market environment.
Many asset prices are high – either at a tipping point
before a correction, or at best reflecting lower return
expectations in the coming years.
It’s no surprise that investors worldwide have piled into
the private credit asset class to diversify their portfolio
without sacrificing returns. The first beneficiaries of
this influx were sponsored lenders, or credit managers
who lend money to companies with a private equity
sponsor. While sponsored lending has its benefits in a
bull market, it can be one of the more risky aspects of
private credit in a late-cycle environment like where we
are today. Many credit managers today cite increased
competition as a result of a growing number of funds
raised that are chasing fewer and fewer opportunities.
These competitive dynamics drive spreads tighter and
yields lower. Consequently, sponsored lenders have
increasingly relied on fund-level leverage to keep
headline returns attractive. All the while, credit risk
metrics such as leverage ratios and loan-to-value show
signs of overextension.
Covenant-lite loans which gained attention in 2014
starting with the syndicated bank loan market have
also made their way into the sponsored lending world.
To be competitive in an auction-style process, it’s now
not uncommon for managers to make covenants and
lender-protection provisions secondary in negotiations.
There are also more and more examples of other
loosening provisions in loan documentation. For
example, EBITDA-addbacks and other verbiage that
allow borrowers to add more debt to their balance
sheets without breaching covenants are on the rise.
All this can lead to more stress in the event of a credit
market downturn.
Darius Mozaffarian
Partner & Co-President, White Oak Global Advisors,
LLC
While sponsored lending originally supported private
equity buyout transactions of the past 10-20 years,
banks have been in the business of lending for
hundreds of years. It is on this bank-lending model
that non-sponsored lenders today base much of their
product offering and value proposition. Because
non-sponsored lenders often directly originate
and underwrite each investment opportunity like a
bank, they establish a direct relationship with the
borrower and have greater say over pricing, terms
and conditions. In this way, direct non-sponsored
lenders can offer higher yields, stronger financial
covenants and better lender protection language than a
sponsored lender participating in a bidding process to
secure a lending opportunity.
Given the market dynamics today of easy monetary
policy and rising asset prices, we expect the global
demand for private credit to remain robust. Yet in a
market where lending to sponsored companies is
becoming increasingly crowded, investors can benefit
by better diversifying their credit risk and exploring
lending opportunities that once were served solely by
banks.
© Preqin Ltd. www.preqin.com 3
PREQIN QUARTERLY UPDATE: PRIVATE DEBT Q3 2019

Fundraising

Q3 continued what has so far been a slow fundraising Fig. 1: Quarterly Global Private Debt
year for private debt, closing just 24 funds for $22bn in Fundraising, Q1 2014 - Q3 2019
capital, both quarterly lows for the year and the lowest
80 70
amount of capital raised in any quarter since Q1 2018
(Fig. 1). That said, Fig. 1 shows a clear cyclical pattern 70

Aggregate Capital Raised ($bn)

60
whereby totals generally peak in Q4 of each year, and No. of Funds Closed 60
50
so 2019 totals may yet rise significantly. 50
40
40
Punctuating the poor fundraising performance this 30
quarter, only a single fund type raised a meaningful 30
20
amount of capital. Usually the strongest performer in 20
the asset class, direct lending funds accounted for 90% 10 10
($20bn) of all capital raised in Q3 (Fig. 2); the $49bn
0 0
raised so far this year leaves them within reach of
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
surpassing 2017’s peak. In the remainder of the asset 2014 2015 2016 2017 2018 2019
class, only the mezzanine fund type has closed more No. of Funds Closed Aggregate Capital Raised ($bn)
than a single fund, and only mezzanine and special
Source: Preqin Pro
situations hit the $1bn mark in fundraising.
focused funds secured $6.5bn, almost half of their Q2
Europe-focused funds bounced back strong from a total, while Asia-focused funds held stable and in the
disappointing Q2, outpacing all other locations with rest of the world only two Latin America-focused funds
$14bn raised (Fig. 3). In contrast, North America- closed for a combined $130mn.

Fig. 2: Private Debt Fundraising in Q3 2019 by Fig. 3: Private Debt Fundraising in Q3 2019 by
Fund Type Primary Geographic Focus
25 16
19.9 13.9
20 14

12 11
15 14
10
10 8
8
6 6.5
5 6

1 1.1 1 1.0 1 1 4
0.0 0.1 0.0 3
0 2
2 1.5
Lending

Situations
Distressed

Fund of
Mezzanine

Venture

Funds
Direct

Debt
Special

0.1
Debt

0
North America Europe Asia Rest of World
No. of Funds Closed Aggregate Capital Raised ($bn) No. of Funds Closed Aggregate Capital Raised ($bn)

Source: Preqin Pro Source: Preqin Pro

4
Funds in Market

The fundraising market for private debt remains Fig. 4: Private Debt Funds in Market over Time,
crowded at the start of Q4, with 417 private debt 2017 - 2019
funds seeking an aggregate $177bn in capital (Fig.
450
4). Although slightly down from the start of Q3, both 417
400 391
figures remain very high compared with historical
totals and could lead to a strong fundraising finish to 350 337
the year after a relatively disappointing 2019 so far. 300 290

250
Direct lending funds account for around half of both the
200 177
number of funds in market and the total capital sought 158 168
(Fig. 5). Direct lending funds also recorded the largest 150 127
drop from the previous quarter in terms of funds in 100
market, showing that the funds are not launching at 50
the same pace as they are being closed.
0
Jan-17 Jan-18 Jan-19 Sep-19
Distressed debt fund types are also seeking less No. of Funds Raising Aggregate Capital Targeted ($bn)
capital than at the start of Q3. All other fund types have
Source: Preqin Pro
held steady or are seeking more capital; notably, three
more funds of funds have entered the market. the fundraise. Among funds in market, 71% have been
on the road for at least a year, and 21% for over two
The total number of funds in market should continue years (Fig. 6) – seemingly large proportions at what is
to drop as more funds hit their final close or abandon generally considered the tail-end of the market cycle.

Fig. 5: Private Debt Funds in Market by Fund Fig. 6: Private Debt Funds in Market by Time
Type Spent in Market

250 100% 3 1.6

7 2.3
90%
200 194 80% 10 6.3
Proportion of Total

70% 20 7.6
150 60%
50%
90 40% 27 13
100 78
30%
48 55
50 20% 17 9.7
27 31 25 30
12 10%
2.1 2.4 11 2.9
0 0%
No. of Funds Raising Aggregate Capital
Lending

Situations
Distressed

Venture Debt
Fund of Funds
Mezzanine
Direct

Special

Targeted ($bn)
Debt

6 Months or Less 7-12 Months

13-18 Months 19-24 Months
25-30 Months 31-36 Months
No. of Funds Raising Aggregate Capital Targeted ($bn) More than 36 Months
Source: Preqin Pro. Data as of October 2019 Source: Preqin Pro. Data as of October 2019

© Preqin Ltd. www.preqin.com 5

 PREQIN QUARTERLY UPDATE: PRIVATE DEBT Q3 2019

Investors

More than half (54%) of future searches and mandates Fig. 7: Amount of Fresh Capital Investors Plan to
issued by private debt investors in Q3 2019 are for Commit to Private Debt Funds over the Next 12
commitments of more than $50mn in fresh capital Months, Q3 2018 vs. Q3 2019
(Fig. 7). Up from 19% in Q3 2018, 29% of investors are
now looking to commit between $100mn and $499mn 100%
11% 8%
to private debt funds, suggesting that investors are Proportion of Fund Searches
looking to allocate more to the asset class. 80% 19% 29%

60% 19%
Attitudes towards direct lending have improved 16%
slightly over the past 12 months, with 47% of investors
40%
targeting the strategy in the coming year, compared
with 43% one year ago (Fig. 8). The proportions of 52% 47%
20%
investors targeting direct lending and fund of funds
strategies have increased slightly compared to a
0%
year ago, whereas the share of investors targeting
Q3 2018 Q3 2019
mezzanine funds has dropped significantly from 60% to Less than $50mn $50-99mn
41% in the past year. $100-499mn $500mn or More

Source: Preqin Pro

Europe continues to dominate the private debt market,
with half of active private debt investors targeting fact, all regions are targeted by smaller proportions of
the region (Fig. 9). Only 41% of active investors are investors compared with this time last year.
targeting North America over the next 12 months. In

Fig. 8: Strategies Targeted by Private Debt Fig. 9: Regions Targeted by Private Debt
Investors over the Next 12 Months, Q3 2018 vs. Investors over the Next 12 Months, Q3 2018 vs.
Q3 2019 Q3 2019

70% 70%
Proportion of Fund Searches
Proportion of Fund Searches

60% 60%
60% 60% 55%
48% 50%
50% 47% 50%
43% 44%
41% 41% 41%
40% 40%
33%
30% 30% 26%
22%
20% 19%
13% 20% 14%
10% 11%
10% 5% 6% 6% 10%
0% 0%
Mezzanine

Venture Debt
Distressed
Direct Lending

Situations

Fund of Funds

Rest of World
America

Asia-Pacific

Emerging
Europe

Markets
Special

North
Debt

Q3 2018 Q3 2019 Q3 2018 Q3 2019

Source: Preqin Pro Source: Preqin Pro

6
 Performance &
Dry Powder

Returns for the private debt asset class as a whole Fig. 10: Private Debt: Horizon IRRs by Fund Type
have slowed over the past year, with distressed debt
and direct lending funds contributing most to this 12%

slump. Over the one-, three- and five-year horizons, 10%

mezzanine funds have performed strongest of the debt
8%
strategies examined, posting an annualized return of Annualized Return
6%
9.8% in the year to December 2018 (Fig. 10).
4%
For the first time since Q4 2016, the PrEQIn Private 2%
Debt Index has fallen as of Q4 2018, after private debt
0%
posted the lowest quarterly return (-0.58%) of the asset
classes displayed (Fig. 11). Despite this, private debt -2%
1 Year to 3 Years to 5 Years to
has continued to outperform real estate and natural Dec-18 Dec-18 Dec-18
resources since 2007.
All Private Debt Direct Lending
Distressed Debt Mezzanine
Of total private debt AUM, direct lending funds account
Source: Preqin Pro
for the largest portion (35%) at $263bn as of December
2018 (Fig. 12). This marks a $60bn increase on the
year-end 2017 figure. At the other end of the scale,
venture debt funds hold $14bn, the smallest amount of
AUM.

Fig. 11: PrEQIn Quarterly Index: Private Debt vs. Fig. 12: Private Debt: Assets under Management
Other Private Capital by Fund Type
300 300
Index Return (Rebased to 100

250
Assets under Management ($bn)

250
as of 31-Dec-2007)

200
200
150 151.5

100 150
132.4
50 97.5
100
0 78.3
50 111.6
Dec-07

Dec-08

Dec-09

Dec-10

Dec-11

Dec-12

Dec-13

Dec-14

Dec-15

Dec-16

Dec-17

Dec-18

75.5 63.5 9.5

39.5 4.3
0
Private Debt Private Equity Direct Distressed Mezzanine Special Venture
Real Estate Infrastructure Lending Debt Situations Debt
Natural Resources Dry Powder ($bn) Unrealized Value ($bn)

Source: Preqin Pro Source: Preqin Pro. Data as of December 2018

© Preqin Ltd. www.preqin.com 7

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