The rapid growth of the private debt market was initially driven by institutional investors during the extended period of historically low and even negative interest rates. They wanted the illiquidity premium private debt offers over public markets, less volatility, diversification and – in the case of defined benefit schemes – assets that could help plug funding deficits caused by low bond yields.
On the supply side, private debt played a vital role in providing capital to companies starved of bank funding post the global financial crisis and continues to play that role.
A lot of investor capital has gone to strategies that favour upper-middle market companies – this part of the market is overcrowded, with high correlation between strategies and significant margin compression.
Even though yields in public markets are higher now, the illiquidity premium in private debt has largely remained intact, as have the diversification and low volatility characteristics. Institutional demand has continued to grow, but increasingly we are seeing demand from the wealth channel and new structures to meet that need, including European Long-term Investment Funds (Eltifs) in Europe and Long-term Asset Funds (LTAFs) in the UK.
For us, it’s not a case of favouring public or private debt – in 2024, we saw significant inflows into both segments – but selecting a mix of assets to build a diverse and resilient investment portfolio. Both public and private debt are an important part of that mix.
If anything, the debate should focus on which part of the private debt market to invest in. A lot of investor capital has gone to strategies that favour upper-middle market companies – this part of the market is overcrowded, with high correlation between strategies and significant margin compression. We believe there is a compelling case for investors to reallocate away from that segment to strategies focused on lower-middle market companies that are less levered but offer higher margins.
*Kirsten Bode is co-head of pan-European debt at Muzinich & Co
