“The global private credit market has reached $3trn assets under management,” according to industry research released on Thursday. Standard corporate lending has remained “dominant” this year, although the proportion of asset under management in asset-backed lending, real estate debt and infrastructure debt strategies has grown significantly.
The fact that the private credit market has surpassed $3trn for the first time “is huge,” , private debt leader at EY in Luxembourg, said in an interview. That figure is up from “roughly $900bn” in 2021, according to EY, which supported the Alternative Credit Council in producing the study. The growth came in the face of recent “headwinds” such as the covid crisis, geopolitical-driven inflation, a spike in interest rates and a global economic slowdown, Remy stated. “In spite of that, the market is still robust.”
He said that private debt funds “play a key role in financing the real economy.” By ‘real economy’ Remy was referring to mid-market firms looking to invest and expand. As Europe aims to exit a period of sluggish growth, “private debt funds have a huge part in making sure that the economy is turning around.”
Deal volumes, the total amount of capital that private credit fund managers provide to companies, was estimated to have doubled over the past two years.
“Private credit has now become a core allocation in the portfolios of most [institutional] investors,” the report stated. The paper cited research released earlier this year by Preqin, a data firm, that found “most investors still have appetite for more private credit,” particularly insurers.
Growth in asset-backed loans
Asset-backed loans represented 20% of total private credit fund lending three years ago, but the segment has doubled to 40% this year, EY told Paperjam. Corporate loans are repaid out of operational cash flow, Remy explained, while asset-backed loans are “based on collateral” and are often used in the real estate and infrastructure sectors.
Risks ahead
The report noted that “there has been a rise in significant loan term adjustments, with the average reported by our respondents increasing from 8.07% in 2023 to 11.65% in 2024.”
Higher interest and inflation rates are concerns for private debt fund managers, Remy observed. Typically, “they structure their loans as variable rates, so, in principle, they are hedged and covered against inflation and movement of interest rates.”
However, many of today’s existing loans were issued “a number of years ago, when the interest rate was relatively low.” Many borrowers are paying “close to zero interest.” And many of those loans are coming to maturity, which “means that a number of borrowers are going to have to renegotiate their borrowings and potentially renegotiate the borrowings at a higher rate.” Faced with higher monthly payments, certain borrowers may struggle to service their debts.
The industry has seen this issue coming, so “it is not a concern, but monitored carefully.”
“What we see with our clients when we help them structure these funds is that generally these loans [are for] five to seven years,” Remy stated. Nearly all are less than 10 years and essentially none are for 15 years or longer.
“Financing the Economy 2024” report
The research was published on 20 November 2024 by the London-based Alternative Credit Council, which represents fund firms that collectively “manage over $2trn of private credit assets,” and EY. The ACC is part of the Alternative Investment Management Association, a trade group that represents 2,100 companies in the private market fund space.
EY in Luxembourg supported the ACC by collecting data and conducting some of the qualitative interviews that were included in the 10th edition of the report. It was the first time the trade association worked with an organisation in the grand duchy to produce the study, EY said.
The was based on a poll of “53 private credit managers and investors,” carried out between 15 July and 16 September 2024. “The survey data was then explored by the ACC and EY in a series of one-on-one interviews with industry leaders,” which took place “in August and September 2024 in London and Luxembourg.” Survey respondents “collectively manage an estimated $2.012trn in private credit assets, and deployed an estimated $333.4bn in 2023.”
What are private credit funds?
Private credit funds--also called private debt funds and private loan funds--lend money directly to companies or buy out existing loans from banks or other lenders. According to Remy, the segment is “an important part of the Luxembourg ecosystem,” with 9 out of the global top 10 debt fund managers operating in the grand duchy, and is the “most dynamic asset class” in the space.
Private credit funds have grown as banks retreat from corporate loans, in large part due to higher capital reserve requirements set by financial regulators starting in 2008, in response to the global financial crisis. At the same time, institutional investors--including pension funds, insurers and --are “searching for the best yield they can get. And today, private debt funds provide very, risk-adjusted, competitive returns to those investors,” compared to public markets.