A report by Deloitte and AIMA on the $560bn private credit market hails alternative credit as a “quiet revolution” in the way that companies secure funding.
The report hones in specifically on alternative lenders and alternative credit managers, with the asset managers surveyed accounting for a grand total of $670bn in funds under management globally. $170bn of this collective pot has been allocated to private credit investment strategies. The sheer volume of money at work within the sector stood out. 15.2% of the managers surveyed had more than $15bn in assets mandated for alternative lending, while nearly 60% had at least $1bn.
Institutional investors like pension funds and insurance funds are identified as by far the largest investors in private credit. The research states that 17% of private debt investors are private sector pension funds, while 16% are public pension funds. 9% of these investors are insurance companies.
The report identifies four different types of alternative lender: those that provide direct credit to businesses, those from a private equity background, those from a hedge fund, and traditional long only managers.
The advantages of alternative lenders, as described by the report, include: speed and flexibility, the ability to support complex deal structures, a long-term relationship model and generally lower levels of leverage. Alternative lenders are described as long-term capital providers, with the majority (41.7%) targeting 4-6 year terms, while not one of the companies surveyed targets terms of less than 2 years in length.
The key limiter for alternative lenders in the private credit sector is borrower demand. The borrowers themselves tend to be mid-market businesses which have often been rejected by the banks, and which are too small for traditional bond markets. The report stressed that the actions of alternative lenders in this market segment have been critical in financing the growth of the economy. The report also sought to stress that alternative lenders are not merely lenders of last resort, and that they run costly and considered credit analyses on borrowers.
Other key findings include the fact that 67% of alternative lenders use banks to source credit opportunities, highlighting the synergies between private debt and the banks. Jack Inglis, CEO of the Alternative Investment Management Association (AIMA), said in a foreword to the research: “Many alternative lenders would not exist without the help of banks and a number of borrowers are actively seeking partnerships that include both traditional and alternative lenders.”
But Deloitte’s own foreword highlighted key advantages for alternative lenders stemming from economic turbulence. In the current low interest rate environment, direct lending is increasingly seen by investors as a sound method for delivering “stable returns”, and also as a means of diversifying their portfolios. With the banks pulling back from certain deals, Deloitte also pointed to opportunities on the borrower side: “As banks are likely to become more risk averse, we expect this will create opportunities for alternative lenders who have locked in capital to target those companies neglected by banks, therefore accelerating the growth of the non-bank lending market further.”
While the US remains the largest private credit market, Europe is catching up fast. The report asserts that eight of the nine most attractive destinations for private credit are located in Western Europe.
Stuart Fiertz, chairman of the Alternative Credit Council and president of Cheyne Capital, said in a foreword: “While the US continues to dominate in terms of size and activity, Europe has made great strides in opening up to direct lending. European markets are now considered the most attractive destination for fundraising in direct lending, a major part of the private credit universe.”
The research turned up a number of concerns about the emergence of fresh regulatory barriers. Some managers have expressed alarm at the recently issued European Securities Markets Authority (ESMA) opinion on loan origination funds “which did not rule out another layer of regulation which would be introduced above the already strict requirements of the AIFMD”.
Marketplace lenders and online lenders were not made mention of in the report, however these sorts of companies are increasingly viewed by fund managers as a small but emerging niche within the alternative credit spectrum. We expect FinTech-based lenders to receive closer attention in future iterations of the report.
The report concludes by reminding readers that even the very largest alternative lenders remain small in relation to the major banks. The latest Prequin figures put the global market for private credit at around $560bn. At the time that the report was written, the world’s 50th largest bank accounted for significantly more assets by itself than the “entire make up” of the private credit survey. But the report also pointed to the fact that private credit is a high growth sector, with appetite from investors unlikely to wane any time soon. Of the managers surveyed, 91.7% anticipate holding greater exposure to private credit in the future, while the remaining 8.3% of investors expect to maintain a similar level of exposure. With this in mind, the report concludes by stating that “alternative lenders are here to stay”.