megatrends
Private credit expands its reach
The New Dynamics of Private Markets
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Since the GFC, credit markets have undergone a period of immense transformation. New capital and liquidity regulations for global banks have made some segments of the lending market relatively unattractive for them. In response, banks have receded notably from the riskier realms of the market. At the same time, investors have been allocating more capital to alternative assets.
$191 BN
Total US private credit fundraising in 2021, compared to $47 billion in 2006.
trends that will shape the private credit markets
Securitized Lending
Real asset debt
private credit growth
corporate lending
Real asset debt
corporate lending
Securitized Lending
private credit growth
Gaining share of corporate lending
Banks have historically been dominant players in most segments of corporate lending but have lost a significant share over the last 20 years.
Banks withdraw from corporate lending
Source: Leveraged Commentary & Data
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Cyclical and structural transformations have led to a significant deepening and broadening of private credit in the post-GFC era.”
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A shifting paradigm for private markets
Private Equity Enters a New Phase
Portfolio Implications
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Private credit is growing in scale
Competition has become quite fierce with the largest credit funds having ample capital to put to work in the highly levered, deal-based segment of the market.
Real asset debt evolves as an institutional asset class
With banks vacating some of the riskier realms of real estate in some regions, new private credit players have stepped in.
U.K. nonbank lenders increase market share
Market share of U.K. nonbank lenders in commercial real estate
Source: Bayes Business School and PGIM Real Estate
Niche segments are becoming more institutionalized
Private credit has picked up where banks left off and is now growing in the specialized lending space.
Source: Pitchbook
Leveraged buyouts grow larger
Median global LBO deal size, US$ Million
Bank share of US leveraged loan market
Investment implications
Discover investment risks and opportunities across private credit.
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Private Credit Investment Implications
1. Manage credit exposure holistically
The lines between public and private credit markets are increasingly blurring (e.g., direct lenders into broadly syndicated loans)
Investors need to view their entire credit exposure collectively to capture opportunities as well as overlapping risks and correlations
2. Look beyond sponsored lending
Attractive investment opportunities in private lending lie beyond the crowded segment of sponsor-backed deals
Seek out direct lending platforms that can source non-sponsored deals and have a strong underwriting and credit track record to navigate across multiple market cycles
3. Energy infrastructure offers unique opportunities
Smaller firms are disproportionately impacted by banks retreating from the conventional energy sector
For investors whose ESG policies permit, structured loans on proven wells can offer attractive coupons and added upside protection in the form of equity or royalties
4. Traditional structured products
Despite the novelty of the more “exotic niches” of specialized lending, their credit scoring models have yet to be tested through a full credit cycle (e.g., “buy-now-pay-later” models)
Traditional structured products – such as CLOs and CMBS – offer tested credit models and structures as well as favorable capital treatment
5. Multifamily rental housing
Post-COVID trends – including a surge in household formation and elevated global home prices – provide a favorable macro backdrop for multifamily rental housing
Multifamily also offers debt investors some inflation protection and better performance through a credit cycle
Banks have historically been dominant players in most segments of corporate lending, but have lost a significant share over the last 20 years. While banks increased their overall share after the GFC, regulatory changes around the implementation of Basel III standards have made them much less competitive and unwilling to lend in the riskier and highly leveraged portion of the market. For example, their share of leveraged loans – often associated with highly levered private equity buyouts – has halved from 30% in 2009 to 16% in 2021.
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As private equity firms go upmarket and buy out larger companies, the size of each debt facility to support these deals has increased.
As the depth of the market for sponsored loans deepens and more capital enters the space, big-ticket leveraged loans from private equity buyouts have become the sweet spot for large private debt funds.
The volume of non-bank real estate lending has surged globally.
Regulatory limitations on commercial banks’ ability to originate and syndicate loans have led banks to reconsider their activity in this segment of the market.
The ABS market is broadly divided into three segments: equipment-based finance, consumer lending and other “esoteric” collateral.
Private credit players are expanding the asset-backed realm by lending against more unconventional assets – like royalties from video or music content and litigation receivables – and securitizing these loans depending on the needs of the end-investors.
New EU rules around open banking will force banks to share borrower data they currently own with fintech companies. This will reduce one of the barriers to entry for a whole array of private lenders in Europe.