Private debt fund managers are facing increasing competition, which is a factor that is keeping them awake at night. Here are some reasons why:
1. Growing Assets Under Management (AUM): Recent research reveals that assets under management (AUM) globally are expected to grow by 11% CAGR between now and 2025, to $1.46tn[1]. This growth is attracting more investors to the private debt market, which is leading to increased competition among fund managers.
2. Investor Interest: Nearly half of investors confirmed that they would be increasing their private debt allocation this year, compared to 2020[1]. This increased investor interest is driving up demand for private debt investments, which is putting pressure on fund managers to find attractive investment opportunities.
3. Lower Lending Standards: With so much investor interest, there is a concern that fund managers may start to lower their lending standards just to close deals and put money to work[4][6]. This could lead to increased risk and potential defaults in the private debt market.
4. Operational Risk: Private debt has the highest risk across private fund types and requires careful management to mitigate exposure[3]. The sheer size, complexity, and growth trajectory of the private debt market is now approaching $1 trillion of Assets Under Management (AUM) with Compound Average Growth Rate (CAGR) of 11.4%[3]. This growth increases pressure on fund managers to understand the risk factors and ensure countermeasures to neutralize them.
5. Sophistication and Conservatism: Fund managers need to bring a high level of sophistication and conservatism to estimating recovery timing based on the risk of the underlying investments[2]. This requires a deep understanding of the market and the ability to accurately assess risk.
6. Diversification: The increased competition among debt investors has been well-covered in the industry press, with managers raising record-levels of capital[5]. This has led to an increasing number of private equity fund managers diversifying across the capital stack and subordinated debt, which allows them to leverage their knowledge of the asset class while offering their clients returns that are still very decent compared to public markets[1].
In summary, increasing competition is a factor keeping private debt fund managers awake at night due to growing AUM, investor interest, lower lending standards, operational risk, the need for sophistication and conservatism, and the importance of diversification.
Citations:
[1] https://pe-insights.com/news/2021/09/28/seven-questions-future-of-private-debt-agnes-mazurek/
[2] https://www.akingump.com/a/web/wCLmrRqCNdyeF6Nqk3Qr5T/2021-akin_gump_key_dynamics_of_private_debt.pdf
[3] https://www.cscgfm.com/blog/strategies-for-reducing-operational-risk-in-private-debt-funds/
[4] https://www.washingtonpost.com/business/2023/08/01/private-credit-investors-should-beware-of-riskier-newbies/fc0fb594-30b1-11ee-85dd-5c3c97d6acda_story.html
[5] https://www.privatedebtinvestor.com/on-the-minds-of-rising-stars/
[6] https://www.bloomberg.com/opinion/articles/2023-08-01/private-credit-investors-should-beware-of-riskier-newbies