The 2008 global financial crisis spurred increased regulation of the banking sector, prompting a surge in the private debt market. Private debt, also known as private credit, involves direct lending to companies, and sometimes individuals, through private market channels, bypassing traditional banking and public market financing.

Unlike publicly traded debt, private debt investments are typically illiquid, meaning they cannot be easily bought or sold on a public market.

Despite its illiquid nature, private debt has emerged as a compelling investment opportunity, offering a lower-risk profile compared to other alternative asset classes and serving as a viable alternative to fixed income. It encompasses a wide range of non-bank loans, including direct lending, mezzanine financing, and distressed debt.

A Rising Star in Alternative Investments

The private credit sector has experienced significant growth, with its value increasing from $1 trillion in 2020 to $1.5 trillion in early 2024. This upward trajectory is projected to continue, with Preqin and Morgan Stanley forecasting a value of $2.8 trillion by 2028.

Source: Preqin

According to a KPMG 2024 survey, the future of private debt is characterised by robust growth offering attractive returns, often surpassing those of public bonds and equities, making it especially appealing in low-interest-rate environments. It offers a diversified investment option, mitigating market volatility risks.

Challenges and Opportunities

While it presents attractive yields and diversification benefits, concerns exist regarding potential risks. Regulatory bodies like the IMF and the Bank of England have highlighted issues such as mis-valuations, hidden leverage, and systemic risks.

In a higher interest rate environment, the vulnerability of highly leveraged businesses and the potential for market instability increase. While private credit offers alternative financing options, it’s crucial to monitor and mitigate associated risks to ensure financial stability.

While concerns remain, Private debt has evolved from a niche investment to a mainstream asset class. Its ability to deliver consistent returns, mitigate risk, and contribute to a sustainable future makes it a compelling choice for discerning investors.

As the global economy continues to evolve, private debt is poised to play an increasingly significant role in shaping the financial landscape.