Investment Fund Ratings Stability Expected as Private Debt Fundraising Outperforms

Private capital fundraising and private debt fundraising have moderated but remain solid. For FY2024, private debt fundraising was expected to be flat but will likely exceed prior year levels. Fund managers with strong relationships and track records are able to raise considerable capital for most recent fund vintages, with direct lending continuing to take the largest share of the capital. The strategy has generated strong risk-adjusted returns for investors and a reliable financing source for borrowers. Nevertheless, headwinds are on the horizon with an uncertain mergers and acquisitions environment, which could lead to a slowdown in debt fundraising, and a dearth of good quality investments amid fierce competition. Deterioration in underlying portfolio company performance remains a risk factor, resulting from either a higher-for-longer interest rate environment or an inability to manage any increased costs from potential tariffs.

Key Highlights:
-- Capital raised for private equity strategies comprises the largest portion of total private capital fundraising followed by private debt funds. Private debt fundraising has been dominated by direct lending, holding the top position since 2017.
-- Private debt assets under management have continued to grow to a substantial $2.0 trillion as of YE2023 when incorporating the retail and insurance channels. These channels will remain important as a source of fundraising for asset managers.
-- Ratings activity for investment funds has primarily been stable in 2024. Morningstar DBRS expects that to continue with Stable outlooks for investment fund debt and subscription loans for 2025.

"Our ratings universe has high-quality fund managers with a proven track record through varying market cycles," says Manna Cheung, Vice President, U.S. Structured Credit Ratings, Funds. "Nevertheless, we remain cautious as we have seen challenging or underperforming ramp-up of portfolios by weaker fund managers, which would lead to potential negative rating performance."