Private Credit set to Continue its Upward Trajectory

Global law firm Dechert LLP and the Alternative Credit Council (ACC), the global body representing asset management firms in the private credit and direct lending space, have today published their Financing the Economy report about the future of private credit.  This research draws together insights from 30 industry leaders and data from 60 firms managing close to US$400 billion in private credit assets.

The research finds that private credit will continue to expand across both existing strategies and into new markets. 68% of survey respondents plan to increase their lending in the SME/mid-market space, despite the sense that this core market is suffering from saturation. Distressed, real estate and asset-backed lending are among the other more popular growth strategies.  

The European and U.S. markets continue to be the biggest source of growth for private credit. Half of respondents expect to invest more capital in Europe while 43% expect to invest more in the U.S. market. A third of managers are targeting future expansion in the Asia Pacific region, with almost 20% specifically targeting either India or China. 

Optimism amongst managers is tempered with a strong sense of realism. 73% of those surveyed expect that the economic and credit cycle will affect their future growth. This sentiment is influencing all aspects of the lending process, from changes to underwriting practices, investment in technology and restructuring capacity. 

The research concludes that institutional capital is driving the future of private credit.  This asset class is a key component in institutional portfolios, particularly for those seeking income producing assets at a time of low yields in public fixed income markets and relatively high equity market valuations. Over 80% of managers surveyed expect to raise more capital from pension funds and insurance companies.

Borrowers prefer the value of a bilateral relationship with a sophisticated counterparty in comparison to commoditised lending products. While private credit began as a funding option for those who could not access bank financing, public bonds or the broadly syndicated markets, it is now also chosen by those who can still make use of these traditional sources.  Today, single transactions above US$1 billion are becoming more frequent.  80% of respondents expect to increase their direct relationships with borrowers. 

Jiří Krόl, Global Head of the Alternative Credit Council, commented: “This year’s ‘Financing the Economy’ report reveals the opportunities and challenges that lie ahead for private credit as it continues to expand. The expansion takes place at a time when questions about the sustainability of private credit become more prominent in the thinking of investors and policymakers. Rather than shying away from challenges presented by them, many managers have put them at the forefront of their thinking when building their businesses.” 

Chris Gardner, Partner, Financial Services at Dechert LLP, added: “Whilst the impressive progress made by the private credit industry should rightly be celebrated, we think private credit managers have only begun to scratch the surface of what is possible for the asset class. There will likely be some challenges ahead and the resilience of business models will be tested over the next five years in different ways. The success of the asset class during this period will come from private credit managers continuing to be a valuable and trusted partner to their borrowers and investors in good and bad times."

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