Financing the Economy 2017 – The Role of Private Credit Managers in Supporting Economic Growth
Dechert is delighted to have collaborated with the Alternative Credit Council (ACC), the private credit affiliate of the Alternative Investment Management Association (AIMA) to produce the third edition of Financing the Economy. The 2017 research comes as the private credit industry reaches an important inflection point. Whilst previous editions of Financing the Economy focused on how the industry, already prominent in the US, established itself around the world as a credible alternative to traditional sources of finance, the past 12 months have seen it cement its place in the lending landscape globally.
Industry growth: The private credit industry is on track to reach around $1 trillion in assets under management (AUM) by 2020, according to ACC and Preqin data. The historic compound annual growth rate of 20% the industry has seen the sector increase in size 14-fold since 2000, reaching over $600 billion by the end of 2016.
Global market: The popularity of the US market is helping to fuel interest in the European and Asia Pacific markets, as managers look for new growth opportunities. Germany, the UK, the US, France and Canada were identified in our research as the five countries that will offer the biggest opportunities over the next three years to 2020.
Lending to companies of all sizes: Smaller businesses are now the largest category of borrower, receiving over 40% of all lending by private credit firms. Almost a fifth (18.4%) of lending now goes to large corporates. Private credit managers are increasingly lending to infrastructure and real estate based operations via a host of arrangements supported by other private credit market participants or in collaboration with banks.
Borrower satisfaction: Flexibility of terms, speed of decision making by fund managers and an ability to finance complex deals are regarded as the key attractions of private credit for borrowers. Many borrowers, especially among SMEs, are wary of diluting their equity stake in their businesses and find the flexible approach of private credit more attractive.
Evolving borrower-manager relationship: 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 14.3% of firms said loan terms had become more demanding.
Expansion of deal origination networks: Managers are diversifying the ways they source potential credit opportunities. Nearly one third say their primary avenue to source potential opportunities is through the relationships and networks they have established within their given industry. Managers are also continuing to look to banks, private equity managers and other industry advisors to help them source new financing opportunities.
Long-term investment: Nearly two-thirds of managers say their preferred target term for investments is now between two and six years, while almost a quarter have a target term of six years or greater (up from only 8% in 2015).
Fund manager discipline: Creditworthiness and sourcing viable opportunities remain the most resource intensive activity for 85% of private credit managers. Levels of leverage remain low across the sector where nearly half (4%) of all managers use no leverage at all.
Fund structures to support lending activity: Almost 70% of all participants have closed-end funds, with 52% being closed-end with fixed maturities. For the roughly 30% of managers with open-ended funds, lock-ups or other liquidity management tools restrict or prohibit fund withdrawals under certain circumstances.
Fund domiciles: The most common domiciles for private credit funds are Luxembourg, the Cayman Islands and the US. Other popular domiciles include Ireland, Jersey, and the UK.
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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).
About the ACC
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 $300bn 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.