Private Debt Funds: What They Are and Trends under Interest Rate Hikes

Koichi Kuroda, Akira Hasebe, Satoshi Ito and Daisuke Ikeda
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Koichi Kuroda: Bank of Japan
Akira Hasebe: Bank of Japan
Satoshi Ito: Bank of Japan

No 24-E-1, Bank of Japan Review Series from Bank of Japan

Abstract: Private Debt (PD) funds are those that specialize in providing loans mainly to middle-market firms with low creditworthiness. Their assets under management (AUM) have expanded mainly in the U.S., as their borrower-investor bases have broadened, against the background of growing investment needs in the low interest rate environment and the strengthening of financial regulations after the global financial crisis. However, with the recent interest rate hikes in the U.S. and Europe, both the average time required to raise new funds and concentration in major PD funds have increased, and the amount of fundraising for new funds has declined. In Japan the market size of PD funds is extremely limited relative to the U.S. and Europe. Potential risks of PD funds include opacity due to lack of disclosed information, the interconnectedness within the financial system, the accumulation of vulnerabilities associated with rapid credit growth, and the liquidity risk of open-end funds. It is necessary to pay close attention to these developments, including their impact on the efficient allocation of resources for sustainable economic growth in the longer run.

Date: 2024-04-12
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