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Personal debt diversifies from direct lending

Direct lending now makes up lower than a 3rd of the worldwide non-public debt market because the asset class continues to diversify into different methods.

PitchBook’s 2023 annual world non-public debt report discovered that direct lending accounted for 31.8 per cent of all fundraising for personal debt final yr, which totalled $190.9bn (£150bn) throughout the sector.

That is down from nearly half of all non-public debt fundraising in 2021.

Different methods have seen development over the previous yr, particularly mezzanine and infrastructure debt.

Mezzanine debt bridges the hole between senior debt and fairness financing and is among the higher-risk types of debt, producing returns of as much as 20 per cent.

Learn extra: Mezzanine debt set to develop in 2024

$36.1bn was raised for mezzanine funds final yr, up from 16.5 per cent in 2022.

The three largest non-public debt institutional funds closed final yr had been mezzanine funds, comprising the eight flagships of Crescent Capital and Goldman Sachs beneath the West Avenue model and HPS Funding’s fifth flagship fund.

“Mezzanine funds have responded to the unmet want for subordinated debt,” PitchBook stated.

“Mezzanine’s junior place within the capital construction signifies that it doesn’t depend towards limits on senior mortgage ratios—an interesting possibility for debtors that want an additional flip of leverage. Moreover, mezzanine lenders are extra comfy with paid-in-kind buildings – a well-liked characteristic in at present’s market as a way to preserve money circulation.”

Learn extra: Direct lending returns will “greater than offset” increased defaults this yr

In the meantime, infrastructure debt fundraising greater than doubled from 2022, with eight fund closings in 2023, together with two of the highest 10 largest non-public debt funds of the yr.

In August 2023, Blackstone introduced the ultimate shut of Blackstone Inexperienced Personal Credit score Fund III at $7.1bn, which was the most important vitality transition non-public credit score fund ever raised.

Pitchbook additionally famous growing non-public debt exercise in asset-backed finance, a market which was historically dominated by banks.

“Personal debt is broadening properly past its conventional roots in direct lending and distressed investing to embody new alternative units in funding grade,” stated PitchBook’s report.

Learn extra: Personal debt AUM handed $1.6trn final yr amid “explosive” development

“Asset-backed finance is the following frontier that non-public credit score managers are pursuing, selecting up share from banks as they’re pressured to present floor.”

Total non-public debt fundraising exercise is predicted to surpass $200bn for the fourth yr after information from late reporting funds is included, though that is anticipated to equate to a ten per cent year-on-year decline.

This was because of a weak second half of 2023 when simply $76.7bn was raised, which PitchBook attributed to giant funds staying open for longer.

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