The size of the global private credit market is on course to break the USD1 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 USD600 billion in assets, has grown 14-fold since 2000. Based on its current growth rate, the sector will reach USD1 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 per cent) of total committed capital is now being lent to SMEs and the mid-market. Large businesses receive around a fifth (22 per cent) of all lending.
AIMA’s CEO Jack Inglis (pictured) says: “Private credit has become a permanent feature of the lending landscape and we forecast that the industry will break the USD1 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 per cent 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 per cent 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 per cent of total assets.
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 per cent of private credit managers uncertain whether it would make the UK a more or less attractive place for financing.
More than two-fifths (45 per cent) of managers say they target loans between USD25 million and USD100 million in size, with around one-in-five targeting loans in excess of USD100 million. Deals are also becoming longer-term investments, with nearly two-thirds (63 per cent) of private credit managers preferring terms of two to six years and almost a quarter of them (24 per cent) favouring terms of six years or greater, up from only 8 per cent in 2015.
Stuart Fiertz, Chair of the Alternative Credit Council and co-Founder of Cheyne Capital, says: “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, says: “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.”
