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How will private credit perform after the crisis?

Real_estate_fundSince the global financial crisis of 2008, the use of private credit as an alternative to bank loans has grown exponentially.

In the aftermath of the global financial crisis, policymakers and regulators in Europe sought to encourage more sources of non-bank lending, which led many asset managers to move into direct lending for the first time.

Global assets in private credit / private debt (the terms are used interchangably) in December 2000 were just US$42.2 billion, according to figures from data provider Preqin. By December 2010 the sector had grown to $311.7 billion and, by June 2019, had mushroomed to $795.3 billion.

Kirsten Bode, co-head of European private debt fund at Muzinich & Co, says that the direct lending market in Europe has in recent years been catching up with the more developed market in the US.

"We now see Europe following in those footsteps with a ten-year delay,” she says. “This has led to a growing and credible asset class and to a systemic change that is here to stay.”

As an example of many European jurisdictions’ direction of travel, Germany used to require providers of corporate loans to have banking licences, a requirement that has been jettisoned as part of the move towards encouraging non-bank lending and stimulating Europe’s capital markets.

The direct lending sector has been further boosted, Bode says, by shrinking yields in liquid markets leading investors to put greater proportions of their portfolios away from government and corporate bonds.

In recent years the direct lending market has evolved, with leverage levels creeping up and contractual terms weakening – a phenomenon described in the industry as covenant-lite.

The big question confronting the sector now, says Bode, is whether economies will bounce back quickly from the coronavirus crisis following a V-shaped recovery or whether a return to normality will take longer.

“Will this be a short dip where we can go back to where we stopped two months ago or is this the beginning of a more significant crisis, where we go back to post-2009 levels of lower leverage and more conservative terms?” she asks.

Read our full report on private credit which appeared in the May edition of Funds Europe.

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