Private Debt Fundraising Declined to $167B in ‘24: Report
Private debt fundraising fell for the third consecutive year to $167 billion in 2024. While this figure is expected to be revised upward as fund managers update their data, it is unlikely to reach the $214 billion recorded in 2023, according to a new report. Market conditions, however, are expected to improve in 2025, potentially leading to a rebound in fundraising activity.
According to research from industry data source Preqin, private debt fundraising in 2024 “has yet to recapture the momentum of 2021.” The research cites the slowdown because of investors being restricted in their allocations due to the denominator effect, wherein decreases in public market valuations render private allocations seem overweight, limiting constraining new capital commitments.
Preqin’s research also pointed to subdued private equity deal flow, which negatively impacted private debt activity. However, the analysis predicts a recovery in 2025, as lower interest rates are expected to stimulate deal flow and improve fundraising conditions.
“Investors have seen strong performance in their public assets, substantially lessening the denominator effect,” the report added. “And with the year of elections done, political risk appears to be receding.”
As fundraising constraints begin to ease, investors remain positive on private debt, recognizing that the challenges were largely external and temporary. Improving conditions, including lower interest rates and a potential rebound in deal flow, suggest that private debt fundraising could recover in 2025, Preqin observed.
Lower interest rates have mixed effects on the private debt sector. While they lead to lower returns for fund managers, they also ease financial pressures on borrowers, reducing the risk of loan defaults. This dynamic can create a more stable lending environment, potentially increasing deal flow and borrower demand, despite the trade-off of lower yields for investors.
Preqin outlined both a bull case and a bear case for private debt. The bull case suggests that an “easing monetary environment and reduced political risk” will create “a rising tide lifting all boats.” This would lead to higher IPO volumes in public markets, improved deal flow in private equity, and increased deal flow in private debt.
The bear case for private debt highlights potential risks, including rising payment-in-kind (PIK) levels in business development companies, which could signal broader stress in the private debt market; increased U.S. bankruptcies, potentially indicating early signs of credit stress; and skepticism from critics, who argue that private debt remains “untested”, as it has operated in a “benign default environment” since emerging from the 2008 Global Financial Crisis.
“Our view is that 2025 will settle the matter, and that the bull case is by a long way the favorite. The bear case, principally based on concerns about default levels, may be true for pockets of the credit market, but the data shows it is not applicable to private debt.”