LONDON – The size of the global private credit market is on course to break the $1 trillion mark by 2020, according to research by the Alternative Credit Council (ACC), the private credit affiliate of the Alternative Investment Management Association (AIMA). Dechert, the global law firm, contributed to and sponsored this year’s survey, titled “Financing the Economy 2017”.
The industry, which manages approximately $600bn in assets[1], has grown 14-fold since 2000[2]. Based on its current growth rate, the sector will reach $1 trillion in assets by the end of the decade, the ACC forecasts.
The “Financing the Economy” report highlighted that small-to-medium-sized businesses remain a dominant feature of the lending market. Around a third (34%) of total committed capital is now being lent to SMEs and the mid-market. Large businesses receive around a fifth (22%) of all lending.
AIMA’s CEO Jack Inglis said: “Private credit has become a permanent feature of the lending landscape and we forecast that the industry will break the $1 trillion ceiling by the end of the decade. Performance across the industry continues to be strong relative to many other asset classes. This has attracted fundraising, as investors hope to capture continued outperformance in the future. The industry continues to deliver flexible deals suited to borrowers’ needs and the success of the sector to date is fuelling its expansion into new markets.”
The survey suggests that private credit managers are having to demonstrate more flexibility as both covenant and coupon terms have shifted more favourably towards the borrower. Nearly half of private credit managers stated that covenants had become less demanding over the past three years with only 14% saying loan terms had become more demanding.
The flexibility shown by private credit managers with respect to loan covenants is matched by their focus on lending standards and commitment to robust risk analysis, with 85% of all private credit managers citing these factors as their most resource intensive activity. At the same time, the preference of private credit managers for senior secure positions within the capital structure means that they are well placed to protect the interests of their investors, says the report.
Dry powder – also known as available capital - is approximately one-third of the industry’s total assets. This is the lowest level it has been for several years and was also considerably higher during the 2000-2008 period, when it was frequently close to 50% of total assets[3].
According to the survey, most private credit activity continues to take place in the US. However, the popularity of the US market is also helping to fuel interest in other markets, as managers look for new growth opportunities. Beyond the key markets of the US and the UK, managers nominated Germany, France and Canada as countries with significant opportunities for lending growth. Meanwhile, regulatory reforms in Europe and Asia-Pacific are supporting the sector as it expands into new markets.
The research suggests that private credit managers are still very much adopting a “wait and see” approach regarding how best to position themselves in a Brexit environment, with 38% of private credit managers uncertain whether it would make the UK a more or less attractive place for financing.
More than two-fifths (45%) of managers say they target loans between $25 million and $100 million in size, with around one-in-five targeting loans in excess of $100 million. Deals are also becoming longer-term investments, with nearly two-thirds (63%) of private credit managers preferring terms of 2-6 years and almost a quarter of them (24%) favouring terms of six years or greater, up from only 8% in 2015.
Stuart Fiertz, Chair of the Alternative Credit Council and co-Founder of Cheyne Capital, said: “As private credit funding continues to have a positive impact on the real economy, the growth of the industry demonstrates how this type of financing is becoming increasingly integral to funding ecosystems globally. For investors too, alternative credit has become an asset class in its own right that provides portfolio diversification and a decorrelated driver of absolute returns. As the industry looks set to maintain this momentum in 2018, the ACC continues to work in support of private credit to ensure it remains a valuable funding mechanism that uses a diligent approach to make quality loans that finance the economy and satisfy investor requirements.”
Gus Black, Partner at Dechert LLP, said: “Private credit funds are increasingly being structured with the borrower in mind – private credit managers are willing to offer greater flexibility and favourable payment options. Growth in alternative credit is good news for borrowers as it presents new and creative ways for them to expand their businesses.”
Note to Editors
• “Financing the Economy 2017: The role of private credit managers in supporting economic growth”, which includes case studies about individual deals, can be found here.
• The paper was based on a survey of 60 private credit managers globally, with an estimated combined AUM in private credit of $500 billion. This figure was calculated using the midpoint of the provided response ranges of estimated committed capital allocated to private credit, and estimated dry powder designated for private credit.
About the Alternative Credit Council
The Alternative Credit Council (ACC) is a global body that represents asset management firms in the private credit and direct lending space. It currently represents over 80 members that manage $300 billion of private credit assets. The ACC is an affiliate of the Alternative Investment Management Association (AIMA) and is governed by its own board which ultimately reports to the AIMA Council. ACC members provide an important source of funding to the economy. They provide finance to mid-market corporates, SME’s, commercial and residential real estate developments, infrastructure as well the trade and receivables business. The ACC’s core objectives are to provide guidance on policy and regulatory matters, support wider advocacy and educational efforts and generate industry research with the view to strengthening the sector's sustainability and wider economic and financial benefits. Alternative credit, private debt or direct lending funds have grown substantially in recent years and are becoming a key segment of the asset management industry. To find out more, visit http://www.lendingforgrowth.org.
About AIMA
AIMA, the Alternative Investment Management Association, is the global representative of the alternative investment industry, with more than 1,800 corporate members in over 50 countries. AIMA’s fund manager members collectively manage more than $1.8 trillion in assets. AIMA draws upon the expertise and diversity of its membership to provide leadership in industry initiatives such as advocacy, policy and regulatory engagement, educational programmes and sound practice guides. AIMA works to raise media and public awareness of the value of the industry. AIMA set up the Alternative Credit Council (ACC) to help firms focused in the private credit and direct lending space. The ACC currently represents over 80 members that manage $300 billion of private credit assets globally. AIMA is committed to developing skills and education standards and is a co-founder of the Chartered Alternative Investment Analyst designation (CAIA) – the first and only specialised educational standard for alternative investment specialists. AIMA is governed by its Council (Board of Directors). For further information, please visit AIMA’s website, www.aima.org.
About Dechert LLP
Dechert is a global law firm with more than 900 lawyers in 28 offices. Over 200 lawyers are dedicated to funds and financial services and 250 lawyers focus on finance matters. The firm has expertise across all major asset classes, fund domiciles and structures and provides expertise at every stage of the investment lifecycle.
We were the first and are the leading major international law firm with a funds practice that spans the key European investment fund centres – Dublin, Frankfurt, London, Luxembourg, Munich and Paris – as well as throughout the U.S., Middle East and Asia. As a result, our lawyers are in a unique position to give jurisdictional-neutral and unbiased advice about the right structures for raising and deploying capital both in Europe and beyond, with strong attention to tax efficiency and market terms.
Dechert is one of the most active law firms in the sphere of debt fund formation, representing a range of debt fund sponsors from large platforms to boutique and emerging managers.
The firm’s internationally recognised finance practice provides complex financings and deal structuring.
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