Key Takeaways
1. Fundraising Stagnation: Private debt fundraising in H1 2022 stagnated but remained on par with last year’s record-setting pace. Direct lending was the leading strategy, accounting for more than a third of the capital raised.
2. Macroeconomic Impact: Rising rates made existing floating-rate loans more lucrative but also made traditional fixed-income investments more attractive.
3. Market Challenges: The leveraged loan and high-yield bond markets in the US and Europe faced significant downturns due to inflation, rising rates, potential recession, supply chain issues, and the ongoing war in Ukraine. The Morningstar LSTA US Leveraged Loan Index was down 4.6% YTD.
Fundraising and Overview
1. Capital Raised: Managers raised $82.0 billion across 66 funds globally in the first six months of 2022. The trailing 12-month fundraising totaled $211.3 billion.
2. Strategy Focus: Direct lending remains the dominant strategy, but special situations and real estate debt funds also gained attention.
3. Geographical Distribution: North American funds dominated, though European and Asian funds have made gains. European funds raised $69.8 billion in 2021, while Asian funds raised over $6 billion each of the last three years.
Spotlight: Leveraged Loans and High-Yield Bonds
1. Market Conditions: The leveraged loan and high-yield bond markets experienced downturns due to macroeconomic concerns. The Morningstar LSTA US Leveraged Loan Index was down 4.6% YTD.
2. European Market: Leveraged loan volume in Europe was €28.1 billion in H1 2022, significantly down from €82.8 billion in H1 2021. The high-yield bond market also saw reduced activity.
3. Recovery Signs: Secondary loan prices showed some recovery in both the US and Europe by the summer, with US leveraged loans gaining 3.7% over two months.
Private Debt Performance
1. IRR and Returns: Private debt performance saw a 3.2% return in Q4 2021, but Q1 2022 showed a pullback to 0.6%. Direct lending returned 7.0% in 2021, while distressed and special situations funds posted a 21.8% one-year horizon IRR.
2. Economic Influence: Rising interest rates in 2022 have impacted the demand for debt and the rates charged. PE firms might reduce leverage usage due to increased costs, potentially reducing deal flow for private debt funds.
Additional Observations
1. Fund Size Impact: Larger private debt funds are increasingly being used by PE for financing deals, with examples of billion-dollar-plus unitranche financings.
2. Geographical Trends: While North American funds dominate, there is a growing interest in non-bank lending in Asia, although the creditor-debtor regimes pose challenges.
3. Market Sentiment: Although there was a summer rally, the overall tone remains cautious with limited expectations for a significant shift in market activity soon.