Research report

Awakening: The rise of private debt

Private debt has grown from niche asset class to a heavyweight due to multiple structural shifts in capital markets—and its growth has shifted the opportunity set for both investors and borrowers.

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March 14, 2024 | 20 minute read

The extension of credit has been a core human social activity for thousands of years. The practice of lending was first recorded in ancient Mesopotamia around 3,000 BC, when early farmers began borrowing seeds and paying the debts with their harvest. Lending flourished in Ancient Greece, where the market became more structured and interest rate limits were imposed. Since then, lending has evolved continuously but society’s need to channel capital from savers to those aiming to consume or invest today has remained consistent. In our view, private debt is yet another example in this long history of lending innovations, and one that is delivering benefits to borrowers, investors and society.

Private debt has grown and become more institutionalized following the Global Financial Crisis (GFC). The key driver of the now $1.6 trillion-dollar market’s growth has been the pullback of banks from non-core lending activities, which has created an opportunity for private lenders to step up. This, in turn, has helped broaden access to credit, allowing a new class of small and medium sized borrowers to tap into high-quality capital.

In our view, the robust growth in private debt reflects multiple ongoing structural shifts in capital markets. Since the GFC, regulation has increasingly limited the spectrum of risk that banks can take, causing them to retreat from certain areas of lending and market making. Access to public markets remains critical, although that channel is not always an option for all businesses as it can be difficult to execute transactions during periods of volatility. Meanwhile, demand for financing continues to grow, boosted by small and mid-sized borrowers and companies that are choosing to remain private for longer.

Key takeaways

  • Private debt has grown from niche asset class to a heavyweight due to multiple structural shifts in capital markets. In our view, many of those changes are set to accelerate in the coming years.
  • For investors, the appeal of private debt comes not only from its income generation, but also its diversifying potential as a reversal in the stock/bond relationship takes hold. 
  • Borrowers have increasingly preferred private debt solutions due to the improved execution, tailored nature and ability to have direct contact with one or a few lenders.
  • In our view, the continued growth in private debt presents benefits not only for investors and borrowers, but also for the functioning of the economy overall.  

This information is educational in nature and does not constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment. FS Investments is not adopting, making a recommendation for or endorsing any investment strategy or particular security. All views, opinions and positions expressed herein are that of the author and do not necessarily reflect the views, opinions or positions of FS Investments. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. FS Investments does not provide legal or tax advice and the information herein should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact any investment result. FS Investments cannot guarantee that the information herein is accurate, complete, or timely. FS Investments makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.

Any projections, forecasts and estimates contained herein are based upon certain assumptions that the author considers reasonable. Projections are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. The inclusion of projections herein should not be regarded as a representation or guarantee regarding the reliability, accuracy or completeness of the information contained herein, and neither FS Investments nor the author are under any obligation to update or keep current such information.

All investing is subject to risk, including the possible loss of the money you invest.

Andrew Korz, CFA

Executive Director, Investment Research

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