Direct lending by asset managers looks set to become an established asset class in Europe, with strong growth estimates for the next 12 months, according to ratings agency Moody's Investor Service.
A report that summarised Moody's 2015 Asset Management Conference, says that reasons for growth in the sector is due to the regulatory environment and reduced appetite for using the conventional banking system after the 2008 financial crisis. Moody's also says that asset managers continue to innovate and provide creative solutions for borrowers in the new regulatory landscape.
Citing an estimate of €15 billion growth in direct lending by Deloitte, Moody's forecasts that the growing number of private debt funds will prompt an increase in fund-raising that will reach critical mass in 2015.
Moody's says asset managers of direct lending funds have demonstrated discipline in credit selection and in pricing to deliver appropriate risk-adjusted returns for investors.
Overall, Moody's notes that, from an investor's perspective, direct lending funds offer higher risk-adjusted returns and generally lower volatility compared to traditional bonds and equities. Borrowers have a couple of advantages, they have the certainty of closing since funds hold most deals and do not syndicate them and asset managers work closely with borrowers through their business cycles by providing bespoke terms and flexible capital beyond traditional bank parameters.
"As bank regulation has become more stringent in recent years, we have seen risk moving away from the banks to other parts of the financial system," says Soo Shin-Kobberstad, a vice president senior analyst at Moody's.
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