4 Private Debt Trends to Watch in 2023

November 16, 2022
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Market uncertainty and mixed outlooks on the odds of a pending recession have made for a confusing time in the private markets as we all wait for clearer signs of what’s ahead. But for a flexible and resilient asset class like private debt, 2023 looks to be a promising new year with new, albeit different, growth compared to what we saw in 2022.  

Read on for the top private debt trends we expect to play out in 2023. 

 Private debt growth in 2023

Some have wondered whether private debt’s rapid growth over the last decade is a bubble, but private debt as an asset class still has room to grow, especially when compared to the size of private equity and venture capital. And in times of market uncertainty – even with an increased risk of middle market loan default – private debt can be an ideal option, offering low volatility with returns dependably above those of the public markets. 

Rain drops hitting umbrella, data showing 91% of investors plan to up their private debt investment; global private debt AUM will grow to $2.69T by 2026.

Distressed debt in 2023

With interest rates climbing and mixed feedback on the emergence of a recession, distressed debt looks particularly attractive to many investors. If more market turmoil is ahead, the market could be ripe with potential distressed deals, and higher borrowing rates raise the possibility of particularly high returns for investors willing to stomach the risk. 

Rising sun graphic next to data showing distressed debt capital growing from 2010 to 2022

Private debt ESG in 2023

There is clear consensus that private market investors and managers alike are bought in on ESG. And as a still-developing asset class, especially when compared to a giant like private equity, private debt has a rich opportunity to build in an ESG focus early on to reap the benefits of established standards and processes down the road. In 2023, we expect to see a closer focus on ESG as managers evaluate potential borrowers during the due diligence process, as well as borrowing rates that correspond with this discovered ESG risk.  

Magnifying glass over ESG graphic, data showing how investors view ESG in private debt.

Venture debt in 2023

While venture debt has been on the rise for a few years now, it will likely hit its prime in 2023. As venture capital investments have slowed amid disappointing tech valuations, startups are on the hunt for capital in some form or another. Combine this with the fact that many larger private debt managers are entering the venture debt space with floating rate-forward funds – indicating strong returns for investors – and this niche strategy seems poised to offer a win to all involved parties. 

Hands exchanging money above a graph showing venture debt's rise from 2015 to 2022

 

Want to know more about what to expect in the new year?  

Study up with the rest of our 2023 trend content: 

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