Private Debt Fundraising Resilient Despite Headwinds — Evening Brief – 02.25.25
Private capital and debt fundraising have slowed, but FY2024 is poised to exceed the previous year’s levels, driven by robust direct lending volumes, according to a Morningstar DBRS report. It’s no surprise—fund managers with proven histories and tight-knit networks are pulling in hefty sums for their latest funds, with direct lending taking the lion’s share of the capital.
The Morningstar DBRS report paints a picture of a strategy that’s been a win-win so far—delivering solid risk-adjusted returns for investors while keeping borrowers funded through direct lending. However, “headwinds are on the horizon,” the reported stated, with a shaky M&A landscape, which could put a dent in debt fundraising momentum.
Additionally, there’s a scramble for decent investment opportunities as competition heats up, making quality deals harder to obtain. Risks are also lurking in the portfolio companies themselves, Morningstar observed. If interest rates stay elevated longer than expected—or if new tariffs raise costs—some of these firms might struggle.
The report underscores a key breakdown in private capital fundraising: private equity strategies are the heavyweight, raking in the biggest chunk of the pie, with private debt funds trailing as a strong second. Within that private debt space, direct lending has been the undisputed leader, holding the crown since 2017. It’s clear that direct lending’s consistency and appeal—both for fund managers and investors—have kept it atop the heap, even as private equity grabs the largest overall share.
Private debt’s growth story is impressive, hitting a hefty $2 trillion in assets under management by the end of 2023, according to the report. A big reason is the inclusion of retail and insurance channels, which have pumped fresh capital into the space. The report flags these channels as a lifeline for asset managers, suggesting they’ll keep playing a crucial role in fueling fundraising efforts going forward.
The report notes that 2024 has been a steady year for investment fund ratings, with most holding firm. Looking ahead to 2025, they’re betting on more of the same—Stable outlooks for both investment fund debt and subscription loans. That suggests a calm horizon, at least from a ratings perspective, with no big disruptions expected to shake things up.
“Our ratings universe has high-quality fund managers with a proven track record through varying market cycles,” says Manna Cheung, VP, U.S. structured credit ratings, Funds. “Nevertheless, we remain cautious as we have seen challenging or underperforming ramp-up of portfolios by weaker fund managers, which would lead to potential negative rating performance.”