BlackRock direct lending boss sees “hype” around ABF market
BLACKROCK’S head of global direct lending has noted “hype” around the asset-backed finance (ABF) market, saying that he sees a limited opportunity there.
ABF has been touted as the ‘new direct lending’ by some industry stakeholders, citing the appeal of security combined with double-digit returns.
The market was valued at $5.2tn (£4tn) by KKR last year and is predicted to swell to $7.7tn by 2027.
Speaking on the sidelines of BlackRock’s 2025 Outlook EMEA Media Roundtable last month, Stephan Caron told Alternative Credit Investor that there was a lot of “hype” around ABF and disagreed with predictions that it will overtake direct lending.
Looking at the European market specifically, he said “you wouldn’t touch” the consumer side of ABF.
While he acknowledged opportunities on the commercial side of ABF, such as receivables financing, he said that there is a limited size to the market.
Despite increased competition within direct lending, Caron said during the roundtable event that he is “extremely bullish” on the sector in the US and Europe, with a slight bias towards Europe
as there is a greater ability to generate alpha.
He noted a “significant pick-up” in M&A activity in Europe which “will continue to fuel 2025” for direct lending.
“Returns are very, very attractive, we’re seeing double-digit returns on deals with covenants,” he said, highlighting particular opportunities in the core middle market.
BlackRock’s Investment
Institute released its 2025 Global Outlook last month, which said that private markets are pivotal in supporting the world’s economic transformation.
“AI hyperscalers are getting to a quantum that is as large as the US government,” said Wei Li, global chief investment strategist at the BlackRock Investment Institute, at last month’s event. >> 4
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Alternative Credit Investor has been prepared solely for informational purposes, and is not a solicitation of an offer to buy or sell any private debt product, or any other security, product, service or investment. This publication does not purport to contain all relevant information which you may need to take into account before making a decision on any finance or investment matter. The opinions expressed in this publication do not constitute investment advice and independent advice should be sought where appropriate. Neither the information in this publication, nor any opinion contained in this publication constitutes a solicitation or offer to provide any investment advice or service.
As we enter 2025, the outlook for the sector is on everyone’s minds.
There are plenty of predictions about what this year will bring, whether that will be more private credit-bank partnerships, increasing adoption of AI or regulatory changes. Ultimately, it is difficult to predict what the longer-term trends will be, as much of this will be dependent on the macroeconomic environment.
Central bank policy, stricter regulation or deregulation, and the possibility of a global trade war all loom on the horizon.
However, what this issue of the magazine should indicate from the vast range of stakeholders interviewed is that the industry is well prepared to ride the wave of any changes which do occur this year.
I’m looking forward to seeing how the sector tackles any new challenges and opportunities as it reaches the next stage in its evolution.
SUZIE NEUWIRTH EDITOR-IN-CHIEF
cont. from page 1
“This is similar in magnitude to previous industrial revolutions.
“There is a greater need for private markets to step up.”
BlackRock has been on an acquisition spree this year to support its expansion into private markets, having bought
infrastructure private markets investment platform Global Infrastructure Partners for $12.5bn in October. It has also agreed to buy private market data provider Preqin for an estimated $3bn.
Last month, it announced that it was
acquiring credit specialist HPS Investment Partners for $12bn, creating an integrated private credit franchise with around $220bn in client assets.
“The HPS deal positions BlackRock to offer comprehensive alternative asset management portfolio
services to the largest institutions in the world, catapulting it into the ranks of the top five private credit managers and significantly advancing its privatemarket growth goals,” said Ana Arsov, Moody's Ratings’ global head of private credit.
Private credit ETFs pose “structural risks”
PRIVATE credit-focused exchange traded funds (ETFs) are starting to enter the market, enabling investors to gain access to the asset class in a more liquid wrapper.
Last month, ETF issuer BlondBloxx launched the BondBloxx Private Credit CLO ETF, providing direct exposure to private credit middle market companies in the US. 80 per cent of the portfolio will be invested in private credit collateralised loan obligations.
In September, State Street and Apollo Global Management announced that they are partnering on an ETF that invests in both public and private credit, marketed to retail investors.
Anna Paglia, chief business officer at State Street Global Advisors, said at the time of the announcement that they are keen to help
make private assets more accessible and liquid over time.
But analysts have warned that putting a liquid wrapper around illiquid assets can bring its own risks, especially for retail investors who may be less familiar with the asset class.
“Given the market appetite for private credit and the ETF structure’s
role as a vehicle for the democratisation of financial markets it is logical that we would see private credit ETFs,” said Kenneth Lamont, strategist at Morningstar.
“The ETFs just launched in the US offering direct exposure may be new, but the problems of providing exposure to illiquid assets in a liquid wrapper is an
age old one. The question is, can you provide safe access to an illiquid assets class without eroding the very benefits that made that asset class attractive in the first place?
“Proving intra-day liquidity to infrequently priced illiquid assets, inevitably means investors in the ETF become exposed to some additional structural risks. In the case of the proposed SPDR SSGA Apollo IG Public and Private Credit ETF in the US, as liquidity provider, the Apollo role is crucial to the functioning of the product. The allure of higher yields may be attractive to retail investors, but they should remain sceptical, as the costs – in terms of higher management fees and additional structural risks – may well outweigh any additional return potential.”
Impact credit funds tipped for resurgence in 2025
PRIVATE credit impact funds are set for a revival in popularity in 2025, following a period of declining investor interest in environmental, social and governance (ESG) and impact investing.
According to the annual ESG Attitudes Tracker by the Association of Investment Companies (AIC), the number of private investors who say they consider ESG dropped for a third year in a row to 48 per cent in 2024. This compares to 66 per cent in 2021, 60 per cent in 2022 and 53 per cent in 2023.
Kathryn Saklatvala, head of investment content at bfinance, said that she has noticed a softening of investor focus on ESG and impact through 2023 and 2024. She believes that this was in reaction to the effect that 2022 had on their portfolios.
“It was a very significant year in terms of seeing losses, and I think there was a bit of a pivot of attention,” she said. “While things like the net zero agenda have remained strong,
some impact intentions have been placed on the back burner.”
However, bfinance’s data suggests that there will be a slight increase in the number of investors who are planning to allocate to that space in the year ahead.
“Its mainly an issue of prioritisation,” Saklatvala added. “Certainly in the last three to six months, we have seen an increase again in searches for impact funds.”
A November survey by L&G found that impact and sustainable mandates will account for 45 per cent of private markets portfolios in two years’ time, up from 37 per cent today. This suggests that investors
are ready to refocus on ESG and impact investing as the macroeconomic environment stabilises, and asset managers are preparing to meet this demand.
Alternative Credit Investor is aware of one private credit impact fund which is currently in the fundraising stage. Meanwhile, Blue Earth Capital recently raised $113m (£88.94m) at the first closing of its first evergreen, semi-liquid impact private credit fund. And the British Business Bank (BBB) has launched a new funding programme aimed at increasing funding to social impact sector lenders in the UK.
“Both supply and demand have increased,”
said Nadia Nikolova, lead portfolio manager, development finance at Allianz Global Investors.
“On the supply side, the rise in impact private equity raising since 2020 means there is a critical mass of investments which require credit.
“On the demand side, we have started seeing specific investor allocations for impact and with private credit having been a well performing asset class so far; impact private credit emerged in 2024 and we expect it to grow in 2025.”
Antoine Maspetiol, head of private debt at Eiffel Investment, agreed that as investors look at the private debt portion of their portfolios, impact solutions are becoming more appealing – but only if they can match non-impact yields.
“Impact remains attractive as long as it is combined with financial performance,” said Maspetiol.
“So yes we anticipate that successful credit impact funds will continue to be attractive in 2025.”
New year, new opportunities
2024 WAS A CHALLENGING year for the property lending market. Starting in December 2021, the Bank of England increased interest rates on 14 successive occasions from 0.10 per cent, up to 5.25 per cent by August 2023. This represented a 16-year high, and elevated mortgage rates combined with a sluggish economy and an ongoing cost of living crisis all contributed to a very subdued property market in the first half of 2024.
Kuflink was able to weather these headwinds thanks to a long track record of prudent lending, and a loyal and active investor base. But Brian West (pictured), head of sales at Kuflink, is looking forward to turning the page on a year that was characterised by economic uncertainty and borrower caution.
“Now that interest rates have started to move down, election uncertainty has been removed, and Rachel Reeves has delivered her first Budget, we are starting to see some tentative green shoots,” says West. “Buyer activity and property demand has been ticking upwards and this is now being reflected in small property price increases.”
West describes Labour’s inaugural Budget as “mixed”. Increases to stamp duty and capital gains tax were negative as were the changes to nondom status, particularly for the high value prime end bridging market, he says.
The end of the non-dom tax status will have a particular impact on property lenders which focus on the kind of high value, prime
properties that are popular with international buyers. Coupled with an increase in stamp duty land tax, this could lead to weaker demand for prime London properties, many of which are acquired using bridging finance.
“Having said that, as a property lender we remain naturally optimistic,” adds West.
“There were positives, most particularly extra funding to try and improve the massive bottleneck in planning, extra funding for affordable homes and for small and medium-sized enterprises in the build-to-rent sector.
“The drive for green energy will undoubtedly produce opportunities for bridging with many property portfolios needing work to achieve improved EPC ratings. Of course, these improved ratings will, in turn, enhance the portfolios value.”
In fact, West believes that the government’s proposed changes to the planning system, which includes the recruitment of an additional 300 planning officers, will ultimately be a good thing for property lenders.
“However, it's important to remember training these new recruits to the point where
they can have a positive impact will take time and resources away from working through the current massive backlog in applications,” he notes.
“Many would argue the investment falls far short of what is needed but there can be no denying it's a small step in the right direction – hopefully with more steps to follow. It will all take time to trickle down.”
Specialist lenders such as Kuflink build their reputations on their ability to adapt to every economic environment and embrace change. Over the course of 2024, Kuflink continued to grow, surpassing £370m in investments, and expanding its team with high profile hires such as West.
Next year the peer-to-peer property lender has ambitious plans to accelerate its growth, with more additions to its sales team planned, as well as geographical expansion.
“We want to increase our regional presence,” says West.
“Whilst we lend in England, Wales and Scotland we want to forge stronger relationships right across the UK.
“Further recruits to the team will widen our reach in 2025 and ensure that our key broker partners, wherever they are in the country, receive enhanced levels of contact. We will be knocking on a lot more doors and making many more face-to-face visits next year to forge ever closer contacts with our broker partners.”
No matter what the new year brings, Kuflink will be ready for it.
Eurazeo plans Lux-based retail fund and fourth ABF product
EURAZEO is planning to launch a new retail fund and its fourth asset-backed financing (ABF) product in the coming months.
The private markets asset manager already has a large retail fund which is structured and based in France. However, Nicolas Nedelec, partner, private debt at Eurazeo, told Alternative Credit Investor that the firm is currently setting up a new European retail fund for next year which will be domiciled in Luxembourg. This will mean that the new fund is open to investors from across Europe, and not just France.
“We've got a fund in France already where we've raised over €1bn (£830m) and that is essentially co-investing
the flagship fund, giving mainstream investors access to direct lending across Europe,” said Nedelec.
“And we'll be setting the same thing up for the rest of Europe, relying on the network of distributors in each single country, which are generally wealth managers or insurance companies.”
Nedelec added that Eurazeo is also raising for its fourth ABF fund,
following the success of its maritime transition fund.
“We're actually raising our fourth ABF fund,” said Nedelec. “ABF is something we've been doing for five to 10 years now already. It is a big thing in the US, but it's not such a big thing in Europe because it's still quite fragmented. And also the European banks have stayed pretty bullish in this area.
“Banks are now
ceding ground, but at varying paces across different countries and industries, so you need to be very cautious about what you do.”
In 2023, Eurazeo partnered with Société Générale on the launch of the Eurazeo Maritime Transition Fund, an assetbacked strategy which is dedicated to supporting the transition towards a more sustainable maritime sector.
NAV finance market to deploy $145bn by 2030
THE NAV financing market is on track to deploy more than $145bn (£114.3bn) by 2030, as the segment continues to grow in popularity following a strong year.
Earlier this year, Oaktree Capital Management and its subsidiary, NAV financing specialist 17Capital, predicted that the market could grow from $44bn in 2023 to $145bn by 2030 as NAV financing plays a “major
role” in the evolution of financial markets.
In a new interview, David Wilson, partner at 17Capital, told Alternative Credit Investor that this target is still in sight.
“We're on the record of having an expected $145bn of deployment by 2030,” said Wilson.
“And we're on track for that with what we’ve seen in the last 12 months.
“Based on what we're seeing, we absolutely
still think that that's the expectation. We won’t go there immediately, but it will be a continual rapid growth between now and 2030.”
Private equity’s assets under management are expected to double over the next six to seven years and Wilson believes that this will lead to higher adoption by private equity managers of NAV finance into their funds.
“We're seeing more
and more managers using NAV loans in their buyout funds,” he said.
“The number of groups we work with is increasing all the time. When we talk to sponsors now, it's not a case of will they do it? It's a case of, when they will do it?
“LPs are more comfortable and better educated on NAV finance and it’s just driving more and more managers to use the tool.”
What investors want
bfinance has a unique insight into the minds of investors, from pension funds and insurers, to endowments, sovereign wealth funds and wealth managers. Kathryn Saklatvala, bfinance’s head of investment content, tells Alternative Credit Investor what these investors are looking for right now.
Alternative Credit Investor (ACI): Can you tell me about bfinance’s work?
Kathryn Saklatvala (KS): We are an investment consultancy with a very global remit. We have clients in more than 40 countries, we have 10 global offices, but we are still very much a mid-sized firm and that’s reflected in our ethos. We help investors across various aspects of strategy and implementation, with highly customised support on everything from asset allocation and portfolio design to manager research and selection, monitoring, ESG, and impact advisory.
Our growth story was very much about being a disruptor, especially with our unconventional model for manager research and selection. We do still do lot of manager selection for clients, but it’s now a mature business with all of the various functions involved in supporting investors across strategy and implementation.
ACI: What are private credit investors currently looking for?
KS: Diversification in private credit portfolios is an important theme: many institutional investors entered private debt within the past decade and are looking to evolve portfolios to become more
resilient and sophisticated, or take advantage of growing specialist subsectors that are becoming mature enough for dedicated allocations. That being said, the nature of the agenda around diversification has changed over time, and with a changing interest rate environment. For example, before 2022, we saw a period of greater focus on strategies such as royalties and trade finance. More recently we’re seeing interest in niche direct lending strategies in sectors with attractive supply/demand dynamics, such as healthcare.
The other thing that's going on that's interesting is how investors are trying to get better at dealing with capital recycling in this asset class. Unlike in private equity or infrastructure, you have to constantly deal with the challenge of what you do with the need for
constant reinvestment. You need to keep applying mental energy to this challenge rather than just reupping into the next funds with the same managers. You need to keep being thoughtful on this. You’ve also got to manage the cashflows and the liquidity aspect, and work out the extent to which you want to deal with managing that liquidity aspect yourself – using relevant asset classes – or use asset manager partners who can handle that with multiple investment strategies. The question becomes more challenging as you reach your target allocation. A lot of investors have gone through a phase of being under-allocated and ramping up exposures towards a target level, but once you reach that allocation the challenge becomes greater. This is an issue of how you evolve and develop a robust sustainable portfolio over time and manage the cashflows around it. And a lot of our clients are grappling with that question.
ACI: And how are they solving that problem?
KS: You can use fixed income, for example, whether that’s absolute return bonds or multi-asset credit or something else. Or you might be using something like leveraged loans, where the risk/ return profile may be a little closer to private credit. There are a lot of different ways to approach this. Some asset managers will provide us a structure whereby they're moving assets back and forth between a leveraged loan portfolio and a private credit portfolio, for example. So there are different ways of handling this problem.
ACI: With your investors, do you find that private credit sits in the
fixed income portion of their portfolio, or in the alternatives part?
KS: It's very often a question of legacy structure and silos, and it’s institutionally-specific. Often when you're introducing new strategies, you're introducing them in the way that makes sense at the time for the stakeholders or for the team as it exists at the time.
That then can create challenges down the line as you look to evolve. If you have private credit sitting by itself, what risk/return expectations have been attached to it, how have you modelled that? If you have it sitting in an ‘alternatives’ portfolio or a ‘private markets’ portfolio or a ‘yield’ portfolio or a ‘growth’ portfolio, it's having to sit alongside asset classes that have a particular profile and it’s having to justify its role alongside them, and then there’s the question of what benchmark or target you’re using for the portfolio: how much risk can be tolerated in that context, and how is success being measured? What happens when it doesn’t quite work, either because the market itself has changed or because you want to introduce new strategies and exposures that may be very attractive but don’t fit the existing set-up?
Ultimately, most investments in your portfolio are essentially a type of equity or a type of debt or a mix of both. You’re trying to get exposure to some aspect of the real economy, whether that’s in liquid or illiquid markets. But there's a reason that you need structures and silos laid on top of that, however artificial they may be in some ways for governance and for modelling. Intuitively, there is a way in which private credit sits alongside fixed income in terms
of the yield-generative profile and some of the risk characteristics. That being said, your real assets should also be delivering yield. So where do they sit relative to each other? It's an ongoing question that investors grapple with from time to time in their own institutions and where change is often necessary.
ACI: How important are high yields to private credit investors?
KS: Definitely, yields on private credit have been very attractive and that’s very important to investors. The way that direct lending has maintained an attractive spread above bonds, even as interest rates rose, it has shown resilience from that perspective. There has recently been some compression depending on the market segment, but overall this asset class has really shown resilience.
That being said, you have to think carefully about the risk profile –how much risk you’re taking for that yield. Default rates are a very inadequate measure of risk. Even though default numbers have not risen much, there are other signs of elevated stress and various things will happen that do affect returns before you reach the default stage. There’s also a change in the profile of returns, such as greater use of payment-in-kind that ultimately defers returns, to a later stage and also makes them more dependent on a corporate event such as a refinancing or some form of exit.
ACI: What are your expectations for private credit in 2025?
KS: Investors are certainly asking a lot about ongoing interest rate declines and how that may affect the asset class. We also can't ignore the decline in private equity fundraising, which has declined in
a way that private credit fundraising has not, and the effect this may have going forward on the private credit market from a demand perspective. I think that there has been a dynamic where there was already quite a bit of private equity dry powder still to be deployed: even when fundraising slowed, you didn’t necessarily see the impact of that for private credit investors seeking deals. Private equity transactions are the lifeblood of the sponsored private credit market. You want private credit managers who really do have very strong sourcing capabilities and have a real edge there. That’s always an important part of due diligence; it's always an important part of the analysis of a manager. You also want to be very focused on workout capabilities and restructuring, which is not just about resources it’s about having a deep understanding of the sector and the prospective exits for the companies you’re lending to.
ACI: What changes are you seeing in the US and European markets?
KS: There has been a theme in the last few years with non-US investors – European, Asian, and Australian – looking to introduce some US private credit into their portfolios. We're interested to see what's going to happen in that respect as to whether the relative attractiveness shifts. For example, we’ve seen European pension funds that started in European direct lending starting to introduce US exposure, and so forth. Asset managers have been very receptive to this; for example, US private debt managers have introduced separate vehicles or feeders that could offer less fund-level leverage that can be more appealing to non-European clients.
A golden source of data
The private credit industry is at an exciting stage in its evolution, bringing operational challenges and opportunities for fund managers. Aztec Group’s head of private credit Kevin Hogan (pictured below right) sat down for a fireside chat with Meera Savjani (below left), fund chief financial officer at Arrow Global, to discuss data, liquidity, AI and more. Alternative Credit Investor was there to report on the discussion…
Kevin Hogan (KH): Can you tell us a little about the history of your career?
Meera Savjani (MS): I’m a qualified accountant and worked at PwC in London. I then spent just over a year working at BP before I joined Apollo Global Management, where I spent almost nine years. My role diversified from credit into hybrid and real estate, so I was essentially looking at everything that Apollo did outside of the US. I then went to Oaktree Capital Management, which was a little bit different as I sat alongside the deal team, working with them, and helping with the operations side. I decided to change again and join somewhere which wasn't so US-centric because I'd worked at two large US asset managers by then. I did around three years at Oaktree before I came to Arrow.
KH: What is your role at Arrow?
MS: I'm the CFO of the fund management business. Arrow’s history has been servicing platforms around Europe. It then evolved into being an asset manager, raising third-party funds, around 2019. I sit within the fund management
part of the Arrow business – I’m on the board of the fund manager and I look after all of the fund offerings that we have in place.
KH: I think you’re uniquely qualified, having gone through audit, outsourcing, scaling, and the US. How have you seen the private credit industry evolve?
MS: It's changed a lot. Even if I think of my time at Apollo, the way that we made investments changed over time. It went from these granular non-performing
loan portfolios that we were purchasing to the point where Apollo owned a Spanish bank through its funds. It's become more and more hybrid as well. It went from the non-performing to the performing, and then to more and more hybrid transactions.
KH: Moving on to liquidity, how do you manage that? LPs have evolved and matured; do you find their demands are changing?
MS: Yes, they are. They’re asking for more and more transparency
of information and there’s an expectation that you can deliver it as well. Not that we didn’t provide bespoke templates for investors previously, but now there are increasing requirements from bodies like the ILPA, and more and more SEC guidance. Whether you're regulated in those jurisdictions or not, LPs want uniformity of information across their managers, in order to know what they're looking at and to be able to make the comparisons. That's what is going to drive more information.
KH: How do you deliver that information in a timely manner to LPs? Do you leverage your vendors or manage it in-house?
MS: For Arrow, it's generally been in-house due to our model, origination and servicing the assets, as well as the fact that we own the asset management and servicing platforms. We obviously rely on our platforms to give us the information, and we have an internal database where we
“
we maintain both speed and accuracy, especially as the demand for transparency grows.
KH: In terms of investments themselves, the deal origination at the very beginning, what process do you go through in terms of modelling forward loans all the way through to maturity? Do you look at the commercials of it?
MS: Yes, it's part of the underwriting process, so we will look at that. If we do the deal, that will factor into the cash flow profiles that you'll need. You're thinking about liquidity from the very beginning of a transaction.
KH: How frequently are you looking at liquidity?
MS: Not as frequently as I would like! While it’s an area that we monitor regularly, we’re always looking for ways to increase the frequency and depth of our analysis. We’re focused on refining our processes and exploring technologydriven solutions to make
LPs want uniformity of information across their managers”
maintain some of this information.
KH: So you can do it at the drop of a hat. You don't have to be quarterly bound.
MS: We’re increasingly agile in how we deliver reporting, but the sheer volume of data does require careful management. We're continuously enhancing our processes and leveraging technology to ensure
liquidity management even more seamless and forward-looking.
KH: It's the CFO talking.
MS: Yes, exactly. I think as ever, we need to get better at doing that. I think that's always the challenge for every manager. We're looking at ways in which we can do that better, whether it's process-driven, but also technology-driven.
KH: What tools do you use to assist you in the funding side of things? I'm talking about sublines. I'm talking about NAV financing. Do you utilise either?
MS: Yes, we have sublines in place for most of our vehicles.
KH: I was on a panel recently that said up to 80 per cent of private markets firms are using sublines at this stage.
MS: As soon as we can have them, we get them in place because there are some LPs that like the use of leverage and the use of sublines to enhance returns. There are others that don't want you to do that, so you're just using it to smooth the capital call process.
KH: Would you ever fund distributions? Would you think of funding distributions from a fund financing tool?
MS: I think it's more about smoothing the cash flow profile, as opposed to thinking about funding distributions. It's more of a short-term bridge, knowing that something's coming in.
KH: Moving on to data. You manage an awful lot of stuff yourself. You have your own platforms. You must have quite a bit of infrastructure in there. Where do you collect your data elements? Who are the vendors that you're getting the data in from? Do you use it to reconcile? How do you consume it?
MS: So that's been an evolving process if I’m honest. Taking a step back, Arrow is obviously a growing firm. So, I compare it to the
Oaktrees, the Apollos of the world. They've had to put together models and technology just because they've had things that exist. And you will have seen this through your lens, they've put things together and technology that doesn't really match or data that is having to go from one place to another to work. They tape it together because it's just too expensive to undo. Arrow has had a really strong focus on the data piece, given that it owns those platforms, and it has its own in-house built tool, which it uses as, I would say, a pseudo portfolio monitoring solution. It's called the Fund Management System. We have data coming in from platforms that we need to collate. But I’ve also been shifting the focus towards looking at our third-party administrators and having to get data back in as well. The other side of it has been utilising the data that we've collated, given that we have so many assets, and our premise has been granular investing, to get the data of 300 or so assets over to an admin. It's quite challenging, and we've done it. However, it can be much more seamless. If we take something like our new lending strategy as an example, we're trying to do that, push it through daily.
KH: It must be wonderful, firstly, having built a system in the data era. You've got a nice, neat tech stack by the sounds of things.
MS: I would say it's an evolving tech stack. We have this Fund Management System as our centre. We've had predominantly one administrator in the past, we've now got a second one in the mix. I don't think we've necessarily utilised those relationships to
the best that we can and the technologies that they also have. It's evolving in that sense. However, we've done some really good things. For example, we've integrated Kyriba with our fund management system. Where you're making an investment, for example, there's an investment
of the world. So how do you go about reconciling all that data, keeping the quality clean? Are you using AI?
MS: We're not using AI for data reconciliation right now. We have an in-house tool that can do the matching piece and then throw
“ AI will become super important in reconciliation”
payment form effectively that has to get signed off. But then it has the bank flows in it, the transactions – that can then go directly into Kyriba through an API. So, the payment input side is already done.
KH: So it's the integration of this data into downstream platforms, which you see as the real benefit?
MS: Yes. Because if you think about it, all the data starts at cash. If you take out everything else from a finance perspective, it’s all about the cash piece. So then what we're trying to do is tag that data. Effectively, when we're engaging with third-party administrators, the model I'm evolving is to say, we'll take this tagged data as well, to book the transactions and drive it, because it's the same source, it's the same data. But rather than collecting data over here and then going back to bank statements and trying to map it out, let's just have it flow through. Then if you take that cash data, you're mapping it out to LPs and doing the investor allocations, and then it's got to come back in.
KH: If I talk accounting, reconciliation is the centre
out the reconciling items. But I think we can do a lot more in that space and AI will become super important in reconciliation. Additionally, if you think about underwriting and other areas, we don't use AI, because I think it's still too new for everybody, but there's definitely benefits to it.
KH: It's an evolving process. I'm excited about the exception management type of AI, the sense checks that you want somebody to eyeball. Do you have anybody working on this?
MS: There is an AI group. They're not specifically working on this piece, but they've been looking at insurance claims, so we can use it more in the origination process. With construction claims you can go through a data tape of thousands in just a few minutes, which could take somebody days. Some of our deal people and the IT team are working on those developments.
KH: In terms of outlook, private credit has been growing tremendously, hasn’t it? You hear the $1.6tn (£1.25tn) [market valuation] going to $2.8tn and
so forth. Do you expect to see a continuation of this trend?
MS: I think it will continue, but I also think it will evolve in terms of the way deals are structured and it will get increasingly competitive. More and more people are seeing it as an opportunity, so they will come into the sector. So, it will still continue to grow, but maybe not at the same rate it has for the last 15, 20 years.
KH: I often see it as a spin-off of private equity, as private credit is the funder of LBOs. So, if private equity slows down, private credit slows down. Is that right?
MS: A little bit, but they also get to be more bespoke in the capital solutions that they're offering. We go back to the hybrid point we were talking about earlier. I think there'll be a bit of a bigger lift in that area. I think we will see capital solutions that are a little bit more bespoke than the traditional private equity.
KH: In the private credit
our platforms. 90 per cent of transactions are off market. We're trying to stay away from being in that competitive environment.
KH: There’s a lot of big players out there, that are going gangbusters in terms of their private credit offering. It becomes harder for the smaller, mid-tier players to get a slice of that. Is it weighted towards the bigger players at the moment?
MS: I don't think so, where you've got the niche experience and the expertise that Arrow has. We focused on five core geographies across Western Europe until now and it's expanded quite significantly – we'll be at eight countries, probably by the end of the year. The way the Arrow premise works is that we only invest in assets and geographies where we have an in-country platform. We try to originate and service our own transactions. Given that, I think we heard [Apollo chief executive] Mark Rowan a few weeks ago say, our origination is the key. So, these
“ 90 per cent of transactions are off market”
environment, the banks seem to be coming back into play a little bit more. You hear about bank financing in a lot of the big deals. They are becoming a real competitor again, where there was a void.
MS: So we don't see it necessarily, at Arrow, just because of the way we are originating. A lot of our origination is happening through
platforms become the key. We have these in what will soon be eight jurisdictions around Europe. We'll have covered off Western Europe probably by the end of the year. A lot of our platforms also service third parties. That's how we're getting a lot of the intel and the knowledge of how we're going to work out some of these.
KH: You've got quite a neat internal system. Is an administrator a necessary evil? You have all your own data; would you look to outsource more in the future?
MS: Being a specialist player, we don't have all the technology necessarily in-house. We've been developing it. When I've been looking at service providers, for me, the focus has been on the technology that they have in place that I don't have in-house. But we're always going to need to have an administrator, in which case I've got to partner with the right people. I've got to have the right technology so that we can have this flow through of data that I envision, and I think many others will do this in the industry, too. For service providers, the challenge is building that tech stack to complement the fund managers. People make choices around preferences whether it is Investran and Geneva or E-Front. But I know some start thinking about Anaplan, for example, and other offerings that they can then make where the service provider is doing that rather than the manager having to do some of that, which is also interesting.
KH: Do you see opportunities for the two combining? Quality of data being the requirement.
MS: Yes. If I think about the finance function and how it's evolved over time, I see it as a data function. I am a golden source of data to the firm to provide all sorts of data so that people can make decisions. Yes, some of those will be decisions that I'm making as well, but that's what people will look to the finance function for.
What does 2025 have in store for the private credit markets?
Ryan McGovern, managing director and investment committee member at Star Mountain Capital
“We expect to see private credit secondaries opportunities continue to increase along with direct private credit investment opportunities in the coming years.
“In the US lower middlemarket, the vast majority of these businesses are founder or owneroperated and many of them are baby boomers nearing retirement age, creating a lot of opportunities for this type of transition capital that we and smaller private credit funds provide. We see continued robust deal activity in both our direct investing and in our secondaries investing and believe it will only increase in the future.”
Isaiah Toback, co-chief investment officer at Castlelake
“We're going to see a rapid expansion in things away from corporate direct lending. I think that the market is starting to really take shape and understand that there needs to be core allocations to any mature private credit allocation for an LP that includes products in addition to corporate direct lending.
“In fact, what I've been hearing in the last couple of quarters is groups who are establishing new private credit allocations where corporate direct lending actually doesn't seem to be a central tenant anymore. It is
a complementary approach. And I expect that to accelerate in 2025.”
Ana Arsov, managing director, global FIG and private credit, Moody’s Ratings
“We believe private credit’s momentum in fundraising and growth will persist into 2025.
“Although we anticipate that interest rate cuts could slightly reduce the profitability for direct lenders, these cuts are expected to boost sponsor M&A activity.”
Patrick Marshall, head of private credit, Federated Hermes
“The 2025 outlook for mid-market direct lending remains favourable for experienced and disciplined lenders, even if there are a few significant economic, geopolitical and regulatory risks on the horizon which will have to be managed with care.
“2025 will be a year where investment discipline should lead to great rewards.”
Joanna Munro, chief executive of alternatives at HSBC Asset Management
“We are positive on the outlook for private credit in 2025 with a range of credit strategies to meet investor investment objectives.
“The private credit market has been particularly resilient in
recent years. Unlike the public market which experienced bouts of volatility in 2024, private credit strategies have been steadily generating positive returns and we expect this to continue into 2025.”
Walter Gontarek, chief executive and chair of Channel Capital Advisors
“We foresee strong growth and related demand for credit by private market issuers, including in the data/software, agentic AI, freelancer and consumer goods markets where we fund actively, based on client forecasts (£1.25tn).
Michel Lowy, chief executive and global co-portfolio manager at SC Lowy
“Broadly, I predict that private credit will continue to expand its role in the global financial ecosystem in 2025. From what we’re seeing from clients and partners this is being driven by increasing demand for customised financing solutions – something that traditional banks and lenders cannot provide (£1.25tn).
Nicolas Nedelec, partner, private debt, Eurazeo
“We are in a transition phase in the industry where we've had 10 years of very strong growth and the asset class is now maturing and being more substantial.
“On the investment side, everybody – ourselves included – expects that 2025 should be a pretty busy year. The trend right now is really good, we’re seeing lots of deal flow coming in from all geographies.”
Michael Von Bevern, comanaging director, Americas, Suntera Fund Services
“Private credit, especially direct lending, has the potential to offer greater risk-adjusted returns for institutional investors in 2025 compared to other asset classes.
“With base rates staying elevated longer than many investors expected in 2024, and as central bankers in developed markets prepare to initiate easing cycles, private debt has emerged as a compelling alternative to private equity for institutional investors, offering attractive risk-adjusted returns.”
Folko de Vries, partner, Clifford Chance
“Based on dry powder available to private equity funds and the current market share of private credit compared to banks, there seems to be ample opportunity for private credit to grow further.
“The general outlook for private equity in 2025 seems to be positive and this is aligned with what we hear from sponsor clients.”
David Wilson, partner at 17Capital
“We're focused on NAV finance, and we have seen a lot of growth in that area over the last few years. We really see it as almost
a subcategory within private credit in its own right now, and one of the fastest-growing areas. We see continued growth in that area, driven by two things. One is that the collateral pool is large and growing all the time, and it's expected to grow at around 10 per cent per annum, so doubling over the next six, seven years or so.
“And the other thing that's really driving the growth is just the increased adoption of NAV finance solutions and their use by private equity groups.”
Nick Holman, head of the UK and Ireland for Kartesia
“The market has been up and down over the last couple of years, but I do think the overall long-term trends are positive for private credit.
“There's a question of whether M&A will bounce back strongly or not for next year. I'm getting a bit of a mixed picture in terms of the amount of volume that will come through. And we've seen the compression in yields and terms because people have raised very well, but there hasn't been enough volume of M&A. In order for the market to stabilise and reach an equilibrium, we need some bounce back in M&A volumes.”
Arif Bhalwani, chief executive of Third Eye Capital
“As we approach 2025, the private credit market – particularly direct lending to sponsorbacked companies – faces significant headwinds.
“Once a high-performing asset class, direct lending now finds itself grappling with tighter
spreads, shrinking premiums over liquid credit, and increased competition – all of which suggest the strategy may have peaked in its current form.”
Matt Bass, head of private alternatives at AllianceBernstein
“What we're going to see in 2025 is the continued acceleration of a longerterm secular trend, which is the growth and diversification of private credit as an asset class, which started its journey as a niche opportunistic investment to now a core allocation.
“In addition to the growth in corporate private credit, there are large segments of the market that continue to move out of the banking system, such as asset-based finance including residential mortgages, commercial mortgages, consumer credit, and transportation. Private capital is playing an increased role here in financing the economy more broadly.”
Kathryn Saklatvala, head of investment content at bfinance
“Private credit has absolutely demonstrated its resilience through the recent macroeconomic transitions and turmoil.
“That being said, I think there are things to look closely at. Spreads have compressed somewhat in the past year, and that varies depending on which part of the market you’re looking at. You need to think carefully about things like higher use of payment-in-kind, which defers a greater proportion of return to a later period and makes realisation more dependent on a subsequent event, such as a refinancing or a sale/exit.”
Sunny outlook
After a strong 2024, private credit is starting the New Year with a growth mindset. Kathryn Gaw asks industry experts what they expect to see in the year ahead.
CRYSTAL BALL GAZING is an imperfect science. But as 2024 drew to a close, there was no shortage of seers predicting great things for the private credit industry in the year ahead.
Macro outlooks have hinged around the expectation of lower rates, which could create a more attractive borrowing environment but may reduce rates for investors. Yield compression has been referenced by some analysts as a key headwind for alternative asset managers, while others are hopeful that a more active origination market could propel the sector to new heights.
There are certainly reasons to be cautious about the shape of the private credit market next year, but across more than a dozen conversations with industry insiders in the final weeks of 2024, the overall picture was one of optimism.
“2024 was without question the most robust year we have seen,” says Isaiah Toback, co-chief investment officer at Castlelake.
“2023, 2024, 2025, these are really the golden vintages, as I see it, of the asset-based credit markets, simply because we're in that Goldilocks period where net capital is actually leaving the market not coming in.”
This sentiment has been repeated across the sector. While a few concerns have been raised around
the transparency, regulation and quality of private credit in 2025, the overwhelming sense is that there is still plenty of room for growth, and an abundance of exciting new opportunities on the horizon for GPs and LPs alike.
“I think the general outlook for private credit next year is pretty bullish,” says Christian Faes, founder and chief executive of Faes & Co.
“There are a lot of big numbers being predicted by credible institutions and market players, and I'm inclined to agree. The general trend with the big banks pulling back from lending, and increased regulation and capital constraints for those players, should mean that there's a long way to go for the private credit sector.”
So what does the year ahead have in store for private credit?
While views are mixed across the industry, there are a few issues on which the majority of people are aligned. Yields will come under some pressure should rates come down more quickly than anticipated. Direct lending and asset-backed financing will see their popularity rise, while investment grade products will remain the domain of the larger managers.
Deal making activity will bounce back, creating more opportunities for loan origination. And GPs
will continue to monitor default risk closely, as the next cohort of Covid-era loans reach maturation.
These predictions suggest that 2025 will require managers to be firing on all cylinders if they hope to distinguish themselves in an increasingly crowded – and visible – field.
“There will be increasing competition among private credit lenders in 2025,” says Michael Von Bevern, co-managing director, Americas, Suntera Fund Services.
“ 2024 was without question the most robust year we have seen”
However, Von Bevern adds that in the rush to secure new deals, GPs must be mindful not to offer too much flexibility in their debt documents, as this could ultimately have a negative impact on the market.
“The big issue for 2023 and 2024 was really the uncertainty,”
adds Nicolas Nedelec, partner, private debt, Eurazeo.
“We were still in the aftermath of Covid, and there were a lot of elections – in the UK obviously, but also France, Germany and the US. Now everything is behind us. So you don't have visibility, but you have less uncertainty,
which means that people can start pricing risk and doing deals and we expect that the buyer and seller gap should reduce.”
Deal making
One of the major challenges for GPs in 2024 was the dearth of dealmaking. In the back half of 2024, M&A activity started to pick up somewhat and most GPs expect this increase to continue next year. For a start, rates are expected to go down across the board, which suggests that there will be a lower cost of financing. This is supportive of valuations, which leads to more transaction activity.
“At some point M&A will bounce back,” says Nick Holman, head of the UK and Ireland for Kartesia.
“From a UK perspective, I think there'll be a modest improvement in the M&A environment, but we have yet to see the heights of the post-Covid boom in M&A that we saw two years ago.”
However, Holman adds that he doesn’t think the New Year is going to start off with a bang.
“I think it's going to be slightly subdued, but I do expect that to pick up at some point with the M&A environment becoming more buoyant as the year progresses,” he says. “Advisors comment that there is a lot in the pipeline, but often we need a catalyst to get the market moving again.
“That said, M&A is only one driver of private credit volume. Refinancings will still continue to be a theme.
“There are also lots of opportunities for sponsorless transactions if you have the origination capability and network to find them. If M&A comes back, direct lending will have a strong year.”
Private credit is now a firmly established presence in the wider financing ecosystem, and with bank retrenchment expected to continue, there should be more opportunities for the sector to steal even more of their market share. And some GPs have their sights set on investment-grade products.
Investment-grade products
Historically investment-grade products have been beyond the remit of private credit, due to the dominance of global banks in this area and the relatively lower yields on offer. In 2024, more and more private credit fund managers began to make inroads into this space, but at the start of 2025 views were mixed on the role that private credit might play in this field in the future.
“We think that non-investmentgrade products will continue to dominate the private credit market next year,” says Michel Lowy, chief executive and global coportfolio manager at SC Lowy.
“From our position in the market, we’re seeing borrowers increasingly demand flexible, high-yield solutions that fall outside the scope of traditional investment-grade lending. This is why non-investment grade products have risen to, and will stay at, the forefront of the market.”
Eurazeo’s Nedelec agrees.
“Alternative credit and private credit is about noninvestment grades,” he says.
“As soon as you dip your toe into this market, it's a different environment. It's a high volume, extremely commoditised industry. You need access to cheap financing and that's where you would see tie-ups with banks. But generally speaking, banks don't have difficulties
distributing that. So I don't see that becoming a big thing next year.”
However, one leading private credit manager told Alternative Credit Investor that he sees the next phase of growth as being expansion “beyond corporate into asset-based finance, which is really conducive to investment-grade private credit”.
“We're financing the same assets, and you've got the same risk-return components. It's just a difference in liquidity,” he added.
These responses suggest that the investment grade space may be reserved for the larger GPs for now, who are increasingly
competing with banks for the attention of more conservative investors such as insurers.
Yield
In 2024 private credit yields hit a 10-year high of 11.65 per cent on average, according to Brookfield Oaktree. While GPs are divided on whether 2025 could be another record-breaking year for the sector, the consensus seems to be for this year’s yields to fall within the 10 to 12 per cent range.
“We could see private credit outperform private equity when it comes to absolute return
allocation,” says Von Bevern. “Some LPs could even see the best risk-adjusted returns they have ever had in 2025. We should anticipate this higher-for-longer rate environment to persist.”
However, Ana Arsov, managing director, global FIG and private credit, Moody’s Ratings, believes that given the anticipated rate cuts and a favourable economic environment, along with competition from broadly syndicated loans, yields are expected to decrease in the year ahead.
This view has been echoed by several industry analysts who
“ There will be increasing competition among private credit lenders in 2025”
all point to falling base rates as a key driver. Lowy has suggested that investors might start to look towards higher-growth private credit markets such as South Korea or India in search of yield.
Regulation
As private credit funds expand and institutional participation increases, regulation is sure to follow. But GPs do not seem to be overly concerned about new regulation in 2025. In fact, USbased GPs expect the incoming Trump administration to usher in a softer regulatory environment.
“The general posture of the incoming administration is more of a deregulatory approach,” says Castlelake’s Toback. “I think that is generally considered positive and generally helpful to the markets.
“I could see the [Trump] administration, in some cases contemplating rolling back some of the regulatory impingements that have created the opportunity for private credit.”
The implementation and global implications of Basel III will be a key focus for European and Asian GPs in 2025. These regulations will continue to constrain traditional bank lending, potentially driving borrowers toward private lenders who can offer more flexible, customised financing solutions.
“Generally, I would expect
increased regulation of private credit,” says Folko de Vries, partner, Clifford Chance. “However, for the foreseeable future, I would not expect there to be a level playing field for banks on the one hand and private credit on the other hand.”
Growth
The expectation is that private credit will continue to grow next year, in many different directions. De Vries thinks that this growth will take place in asset-based transactions given the diversification and additional opportunities to deploy capital that this segment offers. Kartesia’s Holman believes direct lending will boom if M&A transactions pick up. And Moody’s’ Arsov says that investment-grade property and casualty represents the next frontier of growth.
Walter Gontarek, chief executive and chair of Channel Capital Advisors, has predicted “at least a seven per cent industry net increase in new AUM generation” next year in line with Pitchbook estimates, as new investors seek out private credit opportunities. Meanwhile, the largest players in the market appear to be positioning themselves as alternatives to the major investment banks, by expanding their investment-grade product options and investing in retail solutions in anticipation of an influx of wealth market cash in the medium- to long term.
Private credit’s growth depends on a number of factors, from regulation, to investor appetite, to macro-economic issues and higher deal flow. If GPs can continue to seize upon new opportunities while managing existing and emerging risks, 2025 could turn out to be another banner year for the asset class.
