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Private debt in the spotlight

Private debt emerged as a frontrunner in the investment landscape in 2023, earning its title as "asset class of the year" from some analysts. Private debt funds generate returns for investors by acting as a non-bank lender to businesses. Investment interest in private debt has been driven by its high-yield returns with lower volatility and risk than other assets classes in an uncertain macroecnomic environment. On the other side, demand for non-bank lending from borrowers has increased due to the competitiveness of new market entrants at a time when traditional banks have reduced their exposure to some lending categories due to regulatory changes.

Growth and Impact

According to a report by McKinsey, private debt has led the private markets in fundraising growth, AUM expansion, and performance in 2023. This surge is propelled by its high-yield returns, stability and unique security features. Many institutional investors have been rotating out of traditional fixed income products for private debt. Goldman Sachs and Morgan Stanley are just a couple of the major financial institutions that recently announced plans to significantly increase their stakes in private credit, with Goldman Sachs planning to boost its portfolio from US$130 billion to US$300 billion over the next five years and Morgan Stanley looking to double its private credit portfolio in the medium term. Likewise, individual high net wealth investors and family offices are increasing private debt in their portfolios.

The Appeal of Private Debt

The current economic landscape—marked by high inflation, rising financing costs, and market volatility—has made private debt an attractive investment option. This asset class offers investors stable, high-yield returns with the security of debt-style payments. For instance, the Capstone Income Fund offers a 10% per annum target return, achieving double digit returns with less volatility and risk compared to other asset classes.

The appeal is further enhanced by the protective nature of first-ranking debt over real assets, providing a safety net for investor capital. This is because debt is generally repaid first and the debt holder has ability to take over control of the asset and sell it in event of default. Debt funds seek to have sufficient headroom in the value of the assets it lends to protect itself from potential valuation declines, e.g. Capstone Income Fund’s Loan to Value Ratio is 60% - meaning there is $100 of verified value for every $60 lent.

Market Outlook

The latest five year forecast by alternative assets research firm PreQin forecasts that the demand for private debt as an investment choice will continue with an annual growth rate of 11%, reaching an estimated US$2.8 trillion by 2028. This continues the trend of investor appetite for private debt, taking it from a niche to mainstream investment strategy, and demonstrates the optimism from the investment community on the outlook for private debt.

Considerations for Investors

A high-yield product with consistent stable income is worth a closer look for investors. Having said that, investors must closely evaluate potential funds and consider their risk/return appepite. Important aspects to consider include the fund’s strategy, criteria, risk management profiles, and the fund manager's track record. A well-managed fund will navigate economic uncertainties by maintaining a diversified portfolio and focusing on short-duration loans against high-quality assets.

As traditional investment avenues face ongoing challenges, private debt stands out as a resilient and lucrative option. Its capacity to offer high returns with enhanced security makes it a compelling choice for investors looking to diversify and stabilise their investment portfolios in uncertain times.

Reach out if you'd like to understand more about the private debt market, and the Capstone Income Fund.


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