An unprecedented global health pandemic gave way in 2021 to a surprisingly positive year for alternative asset performance--unexpected but, unlike the pandemic, not unwelcome. And unlike the last global black swan--the 2008 global financial crisis--banks in 2021 have emerged as the saviours of the day, whether through extending credit, maintaining liquidity provision, or holding steady interest rates. However, these heroics are due to support from national and regional governments and central banks with the real test being how these markets fare once this support is phased out.
An alternative asset class that truly sprang into its own during the past year is private debt. Also known as private credit, these funds structure bespoke debt packages for small businesses, offering an alternative to the classic bank loan. Following the 2008 financial crisis, this asset class helped to plug the gap left by retreating banks and, in 2021, they have again risen to the challenge. In the 12 months to June 2021, assets under management in private debt in Luxembourg alone hit €181.7bn, a 40.6% increase year on year.
For investors, private debt represents yield and portfolio diversification at a time of low interest rates and market volatility. For the borrower, private credit can tackle increasingly complex business demands in a way that a classic bank loan is unable to, whether through a committed acquisition facility for a buy-and-build strategy or flexibility with covenants. The growth in private debt as an alternative asset class in the coming years is expected to continue.
What will be interesting to see is how this alternative asset class interacts with another 2021 investor preoccupation--environmental and social governance. The close working relationship between lender and borrower has allowed private credit funds to incentivise ESG compliance among their lenders through mechanisms like attractive margin ratchets when businesses perform to certain ESG criteria.
At a time when regulators and investors are demanding a form of ESG grading to prevent greenwashing, firm engagement of this sort from private credit funds could add another layer of attraction to the asset class.
However private debt does not operate in a vacuum. As support to banks is phased out in the coming years, even further inflows into private debt could occur as bank liquidity dries up and credit committees err on the side of safety. Or not. As an interaction and response to bank lending activities, private debt is an area I’ll be watching keenly in 2022.
Best picks in the field of private debt and ESG in 2021:
01.12.21
30.11.21
16.11.21
10.11.21
07.11.21
13.10.21
06.10.21