After a Record-Setting 2021, Private Debt Fundraising Declines in First Half of 2022

In the first half of 2022, private debt fundraising stagnated, according to recent data from PitchBook Data. The slowdown in the sector comes after 2021 was a record-setting year, peaking at a trailing 12-month high of $228.1 billion in total funds raised. At the end of June 2022, the trailing 12-month figure of total capital raised was narrowly short of the record, at $211.3 billion.

Direct lending remained a prominent strategy in private debt, accounting for more than one-third of capital raised in the first half of 2022. Sub-strategies of credit special situations and real estate debt funds also raised large amounts of capital thus far in 2022.

As valuations draw down in the face of rising interest rates, PitchBook analysts anticipate a resumption in private equity deal growth through the second half of 2022. Total private equity deal flow reached $2.0 trillion across the U.S. and Europe in 2021, before reverting in the first half of 2022. Private equity deals have swelled in total value, due to the growth in the amount of funds and firms operating in the space, and in tandem with growth in private market valuations. In 2021, 40.2% of U.S. private equity deals were completed at an Enterprise Value / EBITDA of greater than 15x.

The economic backdrop of rising rates, and a slowdown of global growth, has a neutralizing effect for private debt funds. The floating-rate nature of many private debt vehicles makes existing loans more lucrative, as coupon rates rise with rate hikes. However, due to the rate hikes, traditional fixed-income investments become more attractive to asset allocators. As real yields rise and real returns, above inflation, are positive, investors will be incentivized to position back into highly liquid and more traditional forms of debt securities, such as corporate and government bonds.

With the cost of debt rising, private equity firms using the services of private debt funds for financing may lower their use of leverage, potentially reducing overall deal flow. Though debt funds will be able to collect higher rates of interest on what they do lend.

The PitchBook report highlighted that leveraged loans have particularly struggled thus far this year. In the U.S., institutional leveraged loan volume fell 61.9% from Q2 2021 to Q2 2022. Similarly in Europe, leveraged loan volume in the first half of 2021 was €82.8 billion (US$81.15 billion) and diminished to only €28.1 billion (US$27.54 billion) in the first half of 2022. Moreover, the Morningstar LSTA US Leveraged Loan Index was down 4.6% in the first half of 2022, the worst reading for any comparable period since the 2008 global financial crisis.

In conjunction to overall weakness in the leveraged loan market, in Europe, the high-yield bond market generated its lowest total amount of issuances in the first half of a year since the global financial crisis. In the U.S., high-yield issuances were the lowest in a second-quarter dating back to 2005.