Private debt is projected to increase 11.4% annually, to $1.46 trillion at the end of 2025, from $848 billion at the end of 2020, according to a survey from Preqin about the future of alternative assets that was published today.
Preqin defines private debt as "private equity-structured vehicles that primarily trade in debt and credit instruments." It includes direct lending, mezzanine, distressed, special situations and venture debt funds. Direct lending is the practice of nonbank lenders extending loans to small and medium-sized businesses in return for debt securities rather than equity, according to Preqin.
At year-end 2020, assets under management by alternative assets firms globally is expected to total $10.74 trillion, according to the survey of investors and fund managers, entitled "Future of Alternatives 2025." The total AUM of alternatives is expected to climb to $17.16 trillion by the end of 2025.
Private equity and private debt will be the biggest drivers of the alternative asset class’s growth, according to Preqin.
Private equity will be the fastest-growing asset class, with AUM increasing to $9.11 trillion in 2025, from $4.41 trillion in 2020, for a growth rate of 15.6% — the fastest-growing asset class over the next five years, Preqin's research shows.
Already the largest asset class, private equity will come to dominate the wider alternative asset industry. By the end of 2025, the asset class will account for 53% of all alternatives AUM, Preqin data shows.
"The fundamentals are strong: alternatives funds keep offering investors strong, uncorrelated long-term returns, even through the sustained low-interest rate environment and volatile market cycles of recent years," said David Lowery, head of Research Insights at Preqin.
Investors have been committing increasingly larger amounts of capital to alternatives, a trend that is expected to continue. In fact, 81% of investors expect to increase allocations to alternatives by 2025, according to Preqin. Of the respondents, 58% expect allocations to private debt to increase over the coming five years.
"Historic outperformance from alternative assets funds and expectations of continued low returns in traditional asset classes, especially fixed income, are the main forces driving investors to allocate more capital to alternative assets," according to a statement from Preqin.
More information about the survey and the data can be found here.