Risks to Private Debt Amid Fundraising Struggles: Morningstar
The tough fundraising environment creates risks for funds ramping up debt issuance, according to Morningstar DBRS.
The credit rating agency has warned that the analysis of feeder fund debt during the fundraising period is questionable because the investment pool has not yet been determined. Feeder funds are often utilized to raise cash for funds by issuing delayed draw debt while calling in equity commitments to funds.
According to Morningstar’s Investment Funds: Slower Fundraising Poses Risks to Feeder Funds, the challenges facing the fundraising environment include managers may not be able to meet fundraising targets, resulting in less-diversified portfolios; the longer timeline for fundraising increases uncertainty regarding a fund’s composition; and as capital continues to flow to larger, well-established managers, new and emerging fund managers may struggle to find the capital they need.
Capital raised for private debt funds was $170 billion in the trailing 12 months through the first quarter of 2024, a 31% decrease year-on-year. Capital raised for private debt funds is the second-highest fundraising strategy after private equity ($591 billion raised in the previous 12 months).
In the first quarter of 2024, private debt funds raised $30 billion in capital across 25 funds, compared with $43 billion raised across 28 private debt funds in the same period last year.
“The first quarter of 2024 has been the weakest fundraising quarter for private debt funds since 2016,” wrote Morningstar. “The first quarter is a cyclically slow quarter for fund closings, though, and activity is likely to gain momentum as the year progresses. Despite a potential pickup, concerns remain regarding the increased risks associated with fundraising, especially for newer managers or smaller funds.”
The median time to close a fund is 19 months, the longest on record and far above the 12-month period that was the standard just two years ago. Additionally, Morningstar DBRS reported delays in first closings.
