Pick-up in dealmaking presents new opportunities for private credit managers
PRIVATE equity firms are finally back in the market and hunting for deals, which should help private credit managers in the coming months.
Private equity activity saw its strongest quarter in two years in the second quarter of 2024, according to EY, with groups announcing 122 deals worth $196bn (£151.2bn) in total, up from $100bn in the first quarter. This was the strongest period for capital deployment since the third quarter of 2022, EY said in its report.
As dealmaking slowed down so did the
deployment of private credit funds, which heavily rely on buyout sponsors for new deals.
Looking forward, Callum Bell, head
of direct lending at Investec, expects to see more opportunities in the second half of the year, but warns that the market is still way
off the levels of activity seen in previous years.
“A pickup in M&A is a positive tonic for private credit managers and helps support >> 4
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Two questions have been mooted in my meetings recently – the first one being, where is the ‘sweet spot’ in alternative credit?
The phrase has been used by market commentators to describe anything from the upper middle market, lower middle market, asset-based lending or niche opportunities within commercial real estate debt.
The second question raised is, what actually constitutes alternative – or private – credit?
With semi-liquid products now on the market, and increasing involvement between banks and private credit funds, the lines are becoming blurred on what defines the asset class.
In my opinion, both questions reflect the growing breadth of investors and borrowers tapping into the sector.
The evolution and maturity of the asset class, combined with increasing demand for diversification within the asset class itself, has led many stakeholders to look for new niches and push the boundaries of what defines alternative credit.
As you’ll see in the coming months, these are topics that we’ll be considering in Alternative Credit Investor and we invite all industry participants to contribute their views.
On a separate note, if you haven’t reserved your place yet for the Alternative Credit Awards on 6 November, I encourage you to do so. Tables are selling fast and it’s set to be a great night with lots of valuable networking opportunities.
SUZIE NEUWIRTH EDITOR-IN-CHIEF
cont. from page 1
a more balanced supply and demand and therefore growth,” he said. “This pickup is being supported by some structural tailwinds coming from lengthening PE hold periods and LPs’ desire to recycle capital into new opportunities, both of which will result in an increase in M&A activity.
“While it’s a step in the right direction, we’re not in the territory of a buoyant M&A market. We are seeing a decent amount of activity in M&A and sponsor pipelines which provides me with confidence
around the outlook. And, ultimately, deals attract deals so any signs of positivity should be welcome.”
Marc Chowrimootoo, a portfolio manager and co-head of direct lending for private credit at Hayfin, said he started seeing a gradual return of M&A at the end of 2023 that has continued into this year – a trend he expects to continue.
“We certainly welcome this uptick in activity; it's good for the overall market,” he said. “But the market remains competitive. Given our focus across both the mid
and upper-mid market, we have been fortunate not to need this cyclical upturn to deploy our capital on sensible terms.
“Within a competitive market environment, it is better that private credit managers remain disciplined and continue to invest in line with their investment strategy, rather than being pulled into a race to the bottom on pricing or terms.”
He added that although the rebound in buyout volumes is good news for alternative lenders, the broadly syndicated loan market has also come back, which
P2P lending has returned 7.36pc per annum over the past decade
PEER-TO-PEER lending investments have returned an average of 7.36 per cent per annum over the past 10 years, new data has found.
The recently-launched 4thWay P2P And Direct Lending (PADL) Index has collated a decade’s worth of P2P data from some of the industry’s largest players. It found that P2P lending has outperformed stocks and shares investing by some margin. Over the past decade, share investors in FTSE 100 companies have made 4.90 per cent per annum, after reinvesting dividends and after costs.
The index also found that while there have been no down years for P2P lending investors, stocks and shares investors experienced three down years during the past decade.
“I wasn't surprised that returns have averaged 7.36 per cent per year after bad debts, mostly because the bulk of lending is property-secured, so it should be somewhere in that ballpark,” said Neil Faulkner, chief executive and head of research at 4thWay.
“I don't expect overall
returns to go up over the next year. I currently expect them to be stable or perhaps slightly lower. However, forecasting these things reliably is beyond everyone's ability.
“However, looking at new loans as opposed to ongoing returns, someone who is literally putting their money into new loans today will likely lock in the best returns after losses that I would expect to be higher than long-run average.”
Faulkner added that investors should take some precautionary
means that there is rising competition for upper mid-market borrowers, with banks often providing tighter spreads and more flexible documentation.
“In light of this, larger private credit managers must demonstrate their ability to access attractive deal flow involving companies in sectors, size brackets or situations where the certainty, efficiency, flexibility and resilience offered by a direct lender outweigh the purely economic or documentary incentives to tap the BSL market,” he added.
measures before making their first investment in P2P loans.
They should have enough money to spread an equal amount of funds across a range of platforms and loans.
He has also suggested that investors pause for a month before their first investment, while taking the time to read and learn more on the subject. They should only invest in platforms that are fully regulated and have a strong track record. And they need to understand that P2P lending is a relatively illiquid investment option, and it may be difficult to withdraw funds at short notice.
DWS is looking to “dramatically improve liquidity” in private assets
DWS is assessing how to “dramatically improve liquidity” in private assets in order to serve the retail market correctly.
“The first products for the retail market have been income-based yield with a sliver of liquidity, and have been polarised in single asset classes,” Dan Robinson, EMEA head of alternative credit at DWS told Alternative Credit Investor. “There is not a lot of diversification.
“DWS is looking at how to dramatically improve liquidity.
This can be done by combining a number of different asset classes.
“These could include short-tenor private credit, liquid structured credit, leveraged loans and high yield bonds.
“We are interested in how these could combine with shorter-term loans such as working capital finance and real estate refurbishment loans, so that part of the book is always maturing and self liquidating.”
The asset manager wants to take investment technology from insurance solutions
into the retail market, Robinson added.
The wealth channel has been a huge focus for private capital managers in recent years, as they look to diversify their sources of funding and achieve greater scale.
But regulators and industry commentators have raised concerns about the suitability of these relatively illiquid products for individuals.
“I think the regulator wants to see more retail investors put money into private markets, including via ELTIF 2.0 structures,” Robinson
said. “But they want to see it done in a riskcontrolled fashion especially with regards to the provision of liquidity.
“We believe governments and regulators want people to lend to the real economy, the digital economy, green assets and energy transformation, all of which are key focus areas for DWS.”
DWS’ alternatives business manages €111bn (£94.7bn) of assets, with a particular focus on real estate, infrastructure and liquid real assets.
Ares dominates shortlist for Alternative Credit Awards
ARES Management has gained more places on this year's shortlist for the Alternative Credit Awards than any other company, with nods in six different categories.
The alternative asset manager has been shortlisted for the Fund Manager of the Year award, alongside Permira Credit, Federated Hermes and Eurazeo.
The Ares Senior Direct Lending III fund has also been shortlisted for Fund of the Year ($1bn+) (£0.77bn); while its
predecessor – Ares Senior Direct Lending II – has made the shortlist for the Performance of the Year ($1bn+) category.
Meanwhile, the Ares Pathfinder Fund II is up for the Innovative Fund of the Year ($1bn+) award.
Ares has also been recognised for its thought leadership, with a nod in the Market Commentator of the Year category. It will be competing for this prize against Oaktree Capital Management, Benefit Street Partners,
and Churchill Asset Management.
The firm’s sixth place on the shortlist is for Senior Lender of the Year, alongside Triple Point Private Credit, Pemberton Asset Management, and Permira Credit.
While Ares takes the crown for most shortlisted company, many other alternative lenders also racked up multiple shortlist entries.
Oaktree Capital Management received four nominations – for
Distressed Debt Manager of the Year, Fund of the Year ($1bn+), Special Situations Debt Manager of the Year and Market Commentator of the Year.
Meanwhile, NorthWall Capital, Eurazeo, Fintex Capital, Kuflink and Folk2Folk all made their mark with three places on the shortlist each.
The winners of the Alternative Credit Awards will be announced at a glittering ceremony on Wednesday 6 November 2024 at the Royal Lancaster London.
How compound interest works in peer-to-peer lending
PEER-TO-PEER LENDING
offers a unique opportunity for investors to harness the power of compound interest, enabling them to maximise the value of their returns over time.
At the forefront of this approach is easyMoney, where investors are already reaping the benefits of compound interest by keeping their funds invested for extended periods and reinvesting their monthly interest.
"Our platform pays interest on a monthly basis," explains Jason Ferrando, chief executive of easyMoney.
"This allows our clients to reinvest their interest every month, effectively giving them 12 compounding periods within a year.
“This is a significant advantage over simple interest, which typically compounds only once at the end of the year."
The impact of compound interest can become evident to easyMoney investors within just two months. Initially, interest accumulates as expected during the first month. By the second month, however, investors begin to earn interest not only on their original investment but also on the interest accrued during the first month. As this cycle continues, the amount available for reinvestment grows, leading to increasingly larger returns over time.
Of course, it is important to acknowledge the inherent risks associated with P2P lending, such as the possibility of borrower defaults, which could result in capital losses. However, easyMoney has maintained a strong track record, with no capital losses reported by its investors to date*. Ferrando
attributes this success to the platform’s conservative approach to risk management, which emphasises asset-backed loans and prioritises investor protection.
“We secure our loans with a charge over the assets we lend on, and our average loan-tovalue (LTV) ratio across the entire loan book is conservatively estimated to be below 60 per cent," says Ferrando.
"While not all P2P investment opportunities may be suited for compound interest, the options we provide at easyMoney are certainly designed to take full advantage of it."
The easyMoney platform is built with investor comfort and efficiency in mind. According to the company’s data, most funds are typically invested within 24 hours, allowing investors to start benefiting from compound interest almost immediately. Moreover, the platform pays interest even on weekends and bank holidays, ensuring there are no delays in receiving interest payments.
This attention to detail is just one example of how
easyMoney prioritises the needs of its investors. Another key advantage offered by easyMoney is the ability to wrap investments within an Innovative Finance ISA, which shields all accrued interest – including compounded interest – from taxation.
Additionally, easyMoney offers corporate accounts, enabling businesses to take advantage of lower corporation tax rates compared to some personal income tax brackets. This can further enhance returns by reducing the taxable portion of their earnings.
Despite these various benefits, Ferrando believes that the most significant advantage for investors who commit to a P2P loan for at least a year is the compounding effect itself.
"Compound interest is a powerful tool that has been recognised for centuries," Ferrando adds.
"Every investor should be made aware of its potential. While it may not suit everyone – some of our clients rely on their interest income for daily expenses – those who have allowed their capital to grow through compounding have been very pleased with the results."
By leveraging compound interest, easyMoney is helping its investors achieve greater financial growth with minimal additional effort, demonstrating the value of long-term, strategic investing in the P2P lending space.
*Past performance is no guarantee of future results
DISCLAIMER: Don’t invest unless you’re prepared to lose money. This is a high-risk investment. You may not be able to access your money easily and are unlikely to be protected if something goes wrong.
Alternative credit M&A on the rise
A RECORD number of deals have been taking place in the asset management space, with a particular focus on alternative credit, as firms go after higher revenue-generating businesses during a period where active management has come under increasing pressure.
The latest announcement came from Janus Henderson, a traditional asset manager, which recently announced its acquisition of global private credit manager Victory Park Capital, which has assets under management (AUM) of $6bn (£4.6bn).
Back in July, Seviora Group, an asset manager owned by Singapore’s
Temasek, acquired a stake in credit manager ADM Capital. And Blue Owl Capital bought Atalaya Capital Management for $450m. Meanwhile, BNP Paribas is acquiring AXA Investment Managers.
Many in the sector expect deal activity to continue and for there to be further consolidation.
“There is one big central theme, which is that apart from private equity until recently, there has been no other place in asset management that’s been growing as quickly as
LGIM: Private credit
PRIVATE credit is “here to stay” despite rising risks in the subinvestment grade (IG) part of the market, according to Lushan Sun, private credit research manager at Legal & General Investment Management.
Sun said that the sector has proven itself as a stable source of funding and returns, and has successfully diversified its borrower base in recent years.
alternative credit,” said Chris Acito, founder and chief executive of Gapstow.
“If you consider the last five to eight years of asset management, there hasn’t been a lot of growth, particularly if you’re talking about traditional active management.
“If you’re the owner of an asset management firm you need to be thinking about how you gain exposure to this space. That’s driven a lot of the traditional managers to look at making acquisitions.”
Meanwhile, alternative
credit managers are looking at how they can become bigger, and joining a larger firm gives them the ability to build scale and scope, Acito said.
“I think it is becoming increasingly important in this stage of their evolution,” he added. “You can bring together multiple investment capabilities, you have the scale to support the marketing efforts in the retail world, which takes a lot of people and you don’t do that if you’re a smaller manager.”
According to Gapstow’s annual research, 2023 was a record year for alternative credit M&A with 32 transactions, up 36 per cent year-on-year, acquiring companies with a total AUM of $284bn.
‘here to stay’ despite risks in sub-IG market
However, she highlighted future issues when the economic cycle turns.
“What would be a concern would be a recession,” she told Alternative Credit Investor. “The sub-IG part of the private credit market hasn’t experienced that, as it developed post-GFC. The IG part of the market I’m less concerned about given its longer track record and higher credit quality.
“I definitely think risks are rising in the subIG market. Firms are increasingly struggling to meet higher debt costs. There’s a lack of transparency and disclosure. It’s quite hard to lift the bonnet on what’s going on.
“There’s a risk of a blowout but there’s a lot of flexibility in private credit so I think the industry will manage through the cycle.”
Industry professionals
and regulators have been raising concerns about private credit of late, as the prolonged highrate environment takes its toll on borrowers. Default rates are predicted to tick up, albeit from a low level.
Law firm Proskauer’s latest private credit quarterly index showed an overall default rate of 2.71 per cent between April and June 2024, up from 1.84 per cent in the previous quarter.
Why FSCS cover doesn’t really matter in P2P
THE FINANCIAL
Services Compensation Scheme (FSCS) is seen as a safety net for savers, and it is often regarded as a negative that peer-to-peer investors are not covered by it. However, according to Roy Warren, managing director of Folk2Folk, P2P investors benefit from having alternative protections in place which may in fact provide a better outcome.
“The purpose of the FSCS is often misunderstood,” he says. “It does not cover investment losses but compensates customers when an eligible financial firm fails.”
The FSCS provides compensation up to the value of £85,000 to customers of banks, building societies, or other financial services firms if they are unable to meet their obligations, ensuring that people do not lose out financially if their firms go bust. But there are limitations.
Any sums of money larger than £85,000 are not covered. Additionally, the scheme does not protect against poor investment performance or losses due to market fluctuations. It is specifically designed to cover the failure of a financial institution, not investment risks or losses caused by bad investment performance.
“In general, our existing safeguards such as property-secured loans and our comprehensive wind-down plan already offer substantial protection to our investors,” says Warren.
“And of course, this is against a backdrop of additional protective measures introduced by the Financial Conduct Authority (FCA) in recent years such as appropriateness testing,
high profile risk warnings, and detailed governance and capital adequacy requirements to protect P2P investors.”
While the P2P sector is not covered by the FSCS in the event a platform ceases trading, the FCA requires all P2P platforms to have an effective wind-down plan to enable them to cease regulated activities with minimal adverse impact on customers.
Under its wind-down plan, Folk2Folk retains RSM Restructuring Advisory (RSM) as its standby service provider. This means that, should Folk2Folk cease trading for any reason, RSM will step in and manage the running down of the loan book in an orderly manner, continuing the collection and distribution of repayments to investors.
Additionally, a non-trading trust company (Folk Nominee) holds the charge on behalf of the investors. This means that if anything were to happen to
Folk2Folk, it would not affect the loans, which remain in place.
“At Folk2Folk, we implement robust risk management practices, including thorough due diligence on borrowers, securing loans against property, and maintaining a comprehensive wind-down plan to protect investors’ interests,” says Warren.
“Our wind-down plan protects investors by ensuring continuity in the management and servicing of their loans.”
The FSCS is meant to protect savers and consumer bank accounts, but P2P investors are typically classified as either sophisticated or high-net-worth individuals, with a different risk profile and more expansive portfolios. The average Folk2Folk investor has approximately £300,000 invested in loans on the platform, while some investors have several million in their portfolios.
“In the P2P world, I’d argue that investors are afforded better protection on their money beyond £85,000, if the financial services company goes bust,” adds Warren.
“If all goes to plan, P2P investors should walk away with their capital and interest owed if the platform ceased trading, not just the £85,000 they would have received if the FSCS applied.”
All investments come with the risk of capital devaluation, but it is worth noting that to date Folk2Folk has maintained a zero capital loss track record. Warren puts this down to the underlying risk management policies of the firm, and Folk2Folk’s commitment to protecting investor capital while delivering competitive returns.
CRD VI could impact private credit
NEW EU banking rules
could create a “varied regulatory environment” that impacts private credit funds, experts say.
Amendments to the Capital Requirements Directive – known as CRD VI – were approved by European Parliament on 24 April 2024 as part of a wider set of banking reforms, and are set to come into effect on 1 January 2025.
“CRD VI is set to strengthen the EU banking sector's resilience, emphasising risk sensitivity and global regulatory alignment,” said Prashant Gupta, associate director, private markets at Acuity Knowledge Partners.
“It will introduce more stringent requirements for non-EU banks, potentially reshaping their European operations and impacting the private credit market due to increased regulatory and capital burdens.”
CRD VI restricts crossborder banking activities for credit institutions, meaning banks or ‘class 1’ investment firms, such as a large proprietary trading firm. The new rules do not extend to alternative investment fund managers or credit funds, which could lead to a “varied regulatory environment”, according to Gupta.
Benjamin Maconick,
financial regulation managing associate at Linklaters, suggested that this could potentially have some positive –albeit limited – effects.
“If you do end up with this slightly odd, unlevel playing field where certain types of entities are more restricted by what they can do cross border, it could potentially be positive for private credit managers,” he said. “When it comes to making loans, it could be expected that they may have fewer competitors, but I think most international banking groups have an EU presence nowadays and there are potential ways to structure their lending around these restrictions.
“CRD VI won’t be hugely impactful on private credit, however it could perhaps affect some private credit investors, on occasions
where they lend on balance sheet with banks and that then interacts with funds.”
Conversely, other experts suggest that issues could arise if the regulations are in fact extended to other entities including private credit funds.
“There is a residual risk that credit funds could be impacted through local gold-plating,” said James Wallace, financial services regulatory partner at Simmons & Simmons.
“If a member state into which a third country alternative investment fund manager can currently lend were to implement CRD VI in their jurisdictions so as to require any third country person lending in their territory to establish a local branch, this would clearly have a significant impact.
“Alternatively if the local implementation
of CRD VI were accompanied by changes to the local licensing regime for lending, this could also negatively impact credit funds.
“However, the hope is that local implementation of CRD VI will not impact credit funds. EEA countries which permit third country non-bank lenders to lend also generally allow domestic and EU non-bank lenders to lend, since they do not treat lending as a licensable activity. Arguably the local implementation of CRD IV is unlikely to fundamentally change the regulatory perimeter for such domestic lenders and so hopefully the perimeter for third country non-bank lenders will also remain intact. It will nonetheless be important to track the local implementation.”
Alternative Credit Awards 2024
The Alternative Credit Awards, hosted by Alternative Credit Investor, will take place on 6 November 2024 at the Royal Lancaster London. The winners of the awards will be announced on the night, celebrating the most influential fund managers, lenders and service providers making their mark on the alternative credit space.
Attendees can expect a glittering evening, comprising a drinks reception, gala dinner and awards ceremony.
Tables:
Table of 10
Bubbly on arrival
3 course dinner
Coffee and petit fours
5 bottles of wine
Still/sparkling water
£5,500 +VAT
Premium table of 10 2x bottles of champagne at the table
Prime position near stage
£6,000 +VAT
Sponsorship:
We are offering a range of sponsorship opportunities around the awards, for companies looking to gain valuable brand exposure in the alternative credit industry.
Packages can include presentation of an award, on-site branding, dedicated mailers, advertising and commercial content.
For more information on tables and sponsorship, please contact sales and marketing manager Tehmeena Khan at tehmeena@alternativecreditinvestor.com.
The shortlist for the Alternative Credit Awards has been released, recognising the most influential players in the private debt industry.
Climate transition fund manager of the year
Apollo Global Management
SUSI Partners
ILX Management
BNP Paribas
Distressed debt manager of the year
Oaktree Capital
Management
Arrow Global
NorthWall Capital
Balbec Capital
Fund manager of the year
Ares Management
Permira Credit
Federated Hermes
Eurazeo
Fund of the year
$1bn+
Ares Senior Direct
Lending III
Oaktree Special Situations Fund III
Kartesia Senior Opportunities II
Kayne Anderson BDC
Fund of the year sub $1bn
Fintex Private Debt
Eiffel Impact Debt II
TwentyFour Income Fund
Leste Credit Opportunity
Fund
Impact fund manager of the year
Allianz Global Investors
Eiffel Investment Group
BNP Paribas
Eurazeo
Infrastructure debt manager of the year
Macquarie
Edmond de Rothschild
AXA IM Alts
Rivage Investment
Innovative fund $1bn+
Ares Pathfinder Fund II
Audax Direct Lending
Solutions Fund II
Avenue Europe Special
Situations Fund V
Pemberton Strategic Credit Fund III
Innovative fund sub $1bn
AxiaFunder
M&G Corporate Credit
Opportunities ELTIF
NorthWall European Opportunities Fund I
L&G Private Markets
Access Fund
Junior lender of the year
ICG
Kartesia
Churchill Asset Management
CVC Capital Partners
Lower mid-market lender of the year
Kayne Anderson
Federated Hermes Man Varagon
ThinCats
Market commentator of the year
Oaktree Capital Management
Ares Management
Benefit Street Partners
Churchill Asset Management
Mezzanine lender of the year
Shojin
Fintex Capital
HPS Investment Partners
Goldman Sachs Asset Management
Performance $1bn+
Ares Senior Direct
Lending II
Apollo Diversified Credit Fund
Fasanara Capital Global
Diversified Alternative
Debt Fund
Benefit Street Partners Debt Fund V
Performance sub $1bn
LibreMax Dislocation Fund
Vibrant AMBAR Fund
Fintex Private Debt
Blend Network
Real estate debt manager of the year
LaSalle Investment Management
Blackstone
Precede Capital Partners
Leste Group
Private credit secondaries fund of the year
Coller Credit Secondaries –
Opportunities Fund I
Pantheon Credit Opportunities Fund II
Portfolio Advisors Credit Strategies Fund
Senior lender of the year
Triple Point Private Credit
Pemberton Asset Management
Permira Credit
Ares Management
Special situations debt manager of the year
Arrow Global
NorthWall Capital
Oaktree Capital Management
Tikehau Capital
Wealth market proposition of the year
M&G Investments
Eurazeo
Carlyle
BlackRock
IFISA provider of the year
easyMoney
Kuflink
Folk2Folk
Simple Crowdfunding
P2P lender of the year
Folk2Folk
CrowdProperty
Kuflink
The Money Platform
UK bridging lender of the year (sub-£1bn)
Kuflink
Somo
Shojin
easyMoney
UK property development
lender of the year (sub£1bn)
CrowdProperty
Blend
Relendex
CapitalRise
UK SME finance provider of the year (sub-£1bn)
Folk2Folk
ThinCats
Rebuildingsociety
Compliance service
Vigilant Compliance
Ocorian
Acuity Knowledge Partners
Turnkey Trading Partners
Fund administrator
Aztec Group
BNY
Ocorian
MUFG Investor Services
Socium Fund Services
Law firm – fund structuring
Linklaters
Simmons & Simmons
Macfarlanes
Debevoise & Plimpton
Law firm – transactions
White & Case
A&O Shearman
Dechert
Cahill Gordon
Placement agent
Rede Partners
Campbell Lutyens
Devonshire Warwick
Capital
Stone Mountain Capital
FIRSTavenue
Ratings provider
S&P Global Ratings
Moody’s Ratings
Fitch Ratings
KBRA
Technology provider
Oxane Partners
Broadridge Financial
Services
Allvue Systems
Dilligenz AI
Made to measure
Investment-grade private credit is the golden child of the alternatives family. But a new wave of investors are set to shape the future of this lucrative market. Kathryn Gaw reports.
INVESTMENT-GRADE
private credit is customisable, flexible and growing ever-more popular with investors. Over the past two years, the market has exploded, with some fund managers estimating that investment-grade issuances now make up as much as 90 per cent of the private credit market. As a result, GPs
are now structuring deals with their investment grade in mind.
But with competition for deals intensifying, fund managers have had to become more innovative in order to carve out a share of this lucrative market. This has led to more niche issuances which are stacked with protective covenants and bespoke solutions created
with specific investors in mind.
This is a far cry from just a few years ago, when investmentgrade private credit was an $80bn (£61.42bn) market which catered almost exclusively to life insurers. According to calculations by Voya Investment Management, the investment-grade private credit market is now worth $1tn with
issuances of between $100bn and $110bn per year. The average deal value is around $300m, while yields are typically between 80 and 110 basis points above the equivalent public market returns.
“The landscape for investmentgrade private credit is bigger and broader than ever,” says Andrew Kleeman, senior managing
going to continue to be the secret sauce for insurance companies, but I think we'll start to see more and more take-up on the pension side.
“The asset class is getting more and more attention. The issuers that are coming to this market want to be investment grade.”
Investment grades are assigned by independent ratings agencies
“ The landscape for investment-grade private credit is bigger and broader than ever”
director, head of corporate private placements at SLC Management.
“People are just now starting to understand it is broader than just the life insurance application. It's
such as Moody’s and S&P, who rank private credit instruments based on the quality of the underlying assets, the expertise of the investment team and the likelihood of default.
Jessica Gladstone, managing director in Moody’s’ ratings process and oversight group, confirms that private credit fund managers have been intentionally structuring new products in a way that is intended to secure a higher investment grade in order to attract this new wave of investors.
“Many firms that used to be much more focused on the private equity side are pivoting to invest much more heavily in investment-grade companies through creative, structured investments that offer fairly stable, low-risk returns,” says Gladstone.
“These structures can be more bespoke to suit the specific needs of the company and can be raised without
directly diluting shareholders or raising reported leverage.”
So who are the investors who are influencing these issuances?
In addition to the core contingent of life insurers, there has been a recent influx of property and casualty insurers, health insurers, and even pension funds seeking out investment-grade private credit. These institutions are not quite as conservative as life insurers, but market volatility and the high rate environment has led them to seek out fixed, long-term returns which offer some respite from the uncertainty of the equity markets. Investment-grade private credit fulfils all of these requirements, while also allowing for that bespoke approach that public markets simply cannot offer.
“The general increase in activity is driven both by private credit’s increasing desire to put stable insurance capital to work and also higher interest rates,” explains Gladstone.
“Less favourable market conditions for some industries may drive companies to look for alternatives to traditional equity and debt markets.”
As a more diverse pool of investors pour into the sector, they are reshaping the market according to their needs. Investment-grade private credit differs in one key way from investment-grade public bonds – these deals can come with a seemingly limitless number of covenants.
These covenants act as protections for both the investor and the issuer and they can range from the standard (for instance, a debt to EBITDA test) to something more specialised. Many investors are now requesting priority debt tests, which define the amount of secured debt that the company can
“ The banks aren’t able to originate through the credit spectrum”
have. And more recently, investors have been asking for covenants which are more akin to minority investor protections, which allow for easy exits under certain circumstances, and adherence to certain performance standards.
Every structure will always be bespoke to the issuer, and that is a core part of the value offered by these investments. As well as
taking into consideration investor requests, the details of each issuance will depend on whether it is an infrastructure deal, a corporate deal, or a structured credit deal.
“On the traditional highyield private credit, you'll see covenant strength vary through the cycle,” says Kleeman.
“When times are really good and everyone is competing, they'll weaken the covenants and the definitions.”
Ongoing macro-economic concerns such as higher base rates and higher inflation have meant that fund managers and investors seem to be equally concerned with covenant protections at the moment. Both parties are motivated to create
high quality issuances, starting with the underlying quality of the corporate or asset at the heart of the deal. Secured issuances have become more popular, and this has led to an uptick in asset-backed lending (ABL), infrastructure debt, credit tenant leases, and other loan structures where an underlying asset can be used as security.
“We see investment-grade companies with ABLs from time to time, particularly if the companies have large amounts of easily saleable equipment,” says Gladstone.
An example of this would be United Rentals, an equipment rental business which uses its stock as security. It is currently rated Ba1 stable by Moody’s.
“The asset class as a whole has always been willing to do heavier underwriting, but there's just been more and more opportunities and more issuers that see this as a potential solution than I think, ever before,” says Kleeman. “And that's in both corporate infrastructure as well as structured credit opportunities.”
Investment-grade covenants are often designed to maintain pari passu treatment with other senior creditors, such as banks, who once dominated this space.
“The idea is that whatever the banks need, we need as well,” explains Kleeman. “That level of connection is a critical protection
getting involved in bigger loans and also gaining market share. And now the banks are starting to raise third party capital and create private credit businesses as well.”
Private credit managers and their investors have an opportunity to shape the future of the investment-grade lending market, by demonstrating the value of flexibility and detailed underwriting. And they are already having an impact. The high degree of customisation has led to issuances which are so tightly managed that they are sometimes mistaken for fixed income investments.
“ The issuers that are coming to this market want to be investment grade”
to make sure that other lenders aren't getting ahead of us, and there are strong priority debt limits as far as how much can be secured ahead of us.”
In fact, private credit fund managers have been able to take advantage of a retrenchment by legacy banks, who have shown an unwillingness to lend in recent years. As market conditions start to stabilise, some analysts have predicted that banks and private credit firms may partner on more deals, which allow them to play to their respective strengths.
“The banks aren't able to originate through the credit spectrum,” says Cynthia Sachs, chief executive of data company Versana.
“So a lot of loans that they could have originated a few years ago, maybe they can't originate now for regulatory reasons. And that's now falling to private credit. So now you have private credit
During times of economic stress, it is easy to see why so many investors might be interested in this proposition. But as demand for these products continues to grow, they will face more scrutiny from managers and ratings agencies alike, and diligent underwriting will be the key to the sector’s long-term success. And it has been a long time coming.
“When I got into this industry 17 years ago, it was the sleepy corner of in the shop,” says Kleeman. “But now it is getting more attention.”
As the golden child of the alternative credit sector, investment-grade private credit has a reputation to maintain. As long as investors and fund managers stay on the same page and remain committed to mutually beneficial covenant protections and realistic yields, investment-grade private credit will continue to attract the attention that it deserves.
Structured for growth
Law firm Paul Hastings has been expanding its credit practice recently in anticipation of ongoing market growth. Cameron Saylor, a partner in the firm’s structured credit team, talks to Alternative Credit Investor about his outlook for the credit sector and why a European private credit collateralised loan obligation (CLO) is still a way away…
Alternative Credit Investor (ACI): Tell me about your career at Paul Hastings and in the structured credit team.
Cameron Saylor (CS): At the moment we're one of the largest CLO teams of any law firm in London. And Paul Hastings globally is the largest CLO firm and has been for many years now. I started out at Clifford Chance doing all kinds of different securitisations and structured finance deals, but no one was really doing CLOs back then. At the end of 2014, I had the opportunity to join Ashurst, which was for a long time the top CLO firm. We then moved our team to Paul Hastings in October 2016, principally because the New York Ashurst team had left for Paul Hastings a year earlier. Since then, we’ve built the biggest team in terms of people and deal count and league tables and all the metrics you can judge a law firm team by. So we're really proud of that. We've built up incredible clients. We work for all the top banks in London, and we have a really good list of managers as well that we work with.
ACI: You recently expanded your team. What inspired that decision?
CS: Paul Hastings has been expanding significantly, both in London and globally for some time now. And it's a really exciting environment in that sense. We've hired new partners and teams in businesses and new geographies that have, in a sense, transformed the firm over the last 24 months. Just this year, we've opened offices in Boston and Dallas. We've hired Brian Maher and a couple of really strong associates in his team. Brian does CLOs for Apollo, so he's a much more general securitisation lawyer. We’ve always worked a lot with
Apollo on the bank side. We're now able to work with their team on the manager side, having hired Brian. He’ll also help to build out the broader securitisation business together with one of our existing partners.
ACI: What is the landscape like for structured credit at the moment?
CS: For CLOs specifically, it’s very buoyant. I think it's on track to be the biggest year ever in terms of deal volume. One reason for this is that there are a lot of managers. Europe has something like 50 or 60 active managers, many of whom have raised capital specifically for this purpose, and they need to deploy it. Then there are the interest rates – rates haven't gone down, but the pricing on CLOs has gone down. So the margin above Euribor has tightened, which makes it more attractive.
One of the challenges is just the paucity of assets that people need to scramble on and look for. Additionally, the market’s been really busy on the refinancing side. A lot of deals that were done, particularly in the six months after Ukraine in 2022, were done with really high pricing, but
with shorter non-calls. And that means they're able to refinance them without any restriction in a shorter period of time than normal. Normally, it's about two years. So all those deals have come out of the non-call and they're being refinanced. The volume of refinancing has also increased significantly this year. To give you an example, on our team, we just priced a deal for Apollo and that's our 56th deal of the year. Last year, we did 41 over the whole year. So we're on track to double our rate in terms of the deal count.
ACI: What emerging trends have you noticed in the structured credit sector?
CS: In the European CLO space, managers raising capital to support the CLO business will continue to be important. It used to be the case that people would rely on others to invest in the equity portion of the CLO, and deal to deal, they
worry about. The reporting side is potentially changing, and we've got an eye out on that. But the hope and goal is that it will become simplified and easier for managers and originators to achieve. So there's a lot of focus on it, but equally not a lot of concern.
ACI: How are CLOs reshaping the private credit market?
CS: The private credit market is funded by large credit funds that have raised dedicated capital to lend to mid-market companies. Companies like Ares leverage the funds that they've raised with bank debt. So if they raise a billion from equity investors or LPs, they might get another billion of bank debt on top of that fund. They then have two billion to invest in the private credit space. What we've seen in the US is the use of CLO technology to create a different leverage. So instead of that billion being leveraged with bank debt,
“ The CLO market is on track to be the biggest year ever in terms of deal volume”
would scramble around looking for someone to invest. But now most people are raising dedicated funds that will then, in turn, invest in the CLO. And that's a trend that's been going on for some time, but has become even more important, and I think it has proven to be the best way to build a large business for a CLO manager. On the regulatory side, things are a little bit stable at the moment. That’s not to say that things won't change, but there aren't any proposals right now to be changing risk retention, which is the main thing all structured finance suppliers
it instead is used as equity in CLOs, the proceeds of which are used to invest in private credit. That's what's happened in the US. And it has become a big part of the funding model for private credit lenders, but it has not yet happened in Europe.
ACI: What is the main difference between the US and European CLO markets?
CS: I think the main difference is there's a lot of available bank debt in Europe, and they don't really need CLOs. It was born in the States during a period where
some of the banks were retrenching from lending in that market, so they needed to find a different source of leverage. The CLO market was a good candidate and it grew out of that by necessity. That necessity hasn't yet happened in Europe, as there's more lending capacity than borrowing need. Its an oversupplied market at the moment, and that therefore means it just isn't necessary.
ACI: When do you think we could see the first European private credit CLO?
CS: It might never happen. But I think what will happen is that we will see various intermediate steps towards that, so structures that use a lot of the technology of the CLO, but are more private. And we're already seeing that to an extent.
But in terms of when we will see a full on mid-market CLO like we have in the States, I think it's very hard to say. Broadly speaking, it should be entirely possible but there are a number of hurdles.
At the beginning of 2024, we thought maybe it would happen this year. It hasn't, and I'm not aware of anything in the pipeline.
ACI: What is your outlook for the structured credit market over the next couple of years?
CS: I'm pretty buoyant on the next six, 12, and 18 months. If interest rates are declining, that would be helpful for these deals. If private equity activity increases and then the financing around that increases, that creates more assets that are eligible for CLOs. I think people expect that to happen, and we're feeling pretty confident in terms of the activities that our clients are going to be undertaking over the next period.
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