While the 'traditional' capital market suffers in the grip of inflation, rising rates and the risk of recession, there is one segment of the market that is growing and enjoying excellent health: private debt.
Private debt develops as a form of financing mainly from institutional investors such as funds and investment companies (excluding banks), but also from private individuals. Compared to corporate bonds of listed companies, these debt securities are generally illiquid and not traded on regulated markets. Private debt transactions, in fact, generally take place on platforms dedicated to digital lending.
Private debt has proven in recent years to be an asset class of growing importance and destined to occupy the same importance in Italy as in other European countries. AIFI, the Italian private equity, venture capital and private debt association, recently presented data from a survey conducted in collaboration with Deloitte.
In 2021, a total of EUR 4.6 billion was invested in the Italian private debt market, including all private debt activities, i.e. not only private debt in the strict sense, but also digital lending platforms, distressed debt and fund investments.
Spurring growth are the high yields of direct lending, which in itself includes a premium for not being immediately liquid and manages to hold its own against other asset classes comparable in terms of risk level.
In the United States, the Cliffhanger Direct Lending Index, which measures the performance of private debt, has outperformed competitors in liquid markets for 12 of the past 17 years. In Europe, the sector is younger and there is as yet no similar index allowing meaningful comparisons with the US.
Prequin estimates the value of assets under management in private lending to be growing at 13.5% per year globally, compared to 11.5% for private equity & venture capital and 9% for real estate. The same report predicts a shift from the current $372 billion in assets under management through private lending in Europe to $877 billion by 2026. This will allow private debt to overtake real estate and take second place among alternative forms of financing, behind only private equity & venture capital.
Also favouring the use of private debt are the guarantees offered to investors in Europe (almost exclusively coventant and therefore less risky than leveraged loans, which are 97% convoluted) and more reliable selection processes based on in-depth due diligence.
In Italy, 51% of the financing raised through private lending goes to support core projects of company development and growth, while 37% is directed at financing LBO (Leveraged BuyOut) transactions, i.e. the acquisition of a company. Here, private equity companies are often involved, which then carry out the BuyOuts with the help of private debt. Then there is a residual 11% share represented by the refinancing of existing debt.
Interestingly, private debt in most cases complements other alternative finance instruments that are emerging to facilitate the development and strengthening of companies. Together, these instruments give rise to forms of investment diversification that are vital at a time when crises - as we are seeing - follow one another at short intervals, limiting access to one or the other mode of financing or capitalisation.