Five Forces Shaping the Future of Private Credit

The fifth edition of the Alternative Credit Council’s (ACC) ‘Financing the Economy’ report has identified five key factors driving the development of private credit

Jirí Król, Deputy CEO & Global Head of Government Affairs, Alternative Investment Management Association

In the final quarter of 2019, the Alternative Credit Council (ACC) published the fifth edition of our Financing the Economy[1] research. The publication is central to our engagement with investors and policymakers, as we work to improve our understanding of private credit and support the sustainable growth of the asset class. Our research identifies five key forces shaping private credit’s future:

1. Structural tailwinds supporting the industry’s growth. These include the increasing attraction of private markets to investors, bank retrenchment and the appeal to borrowers of a bilateral relationship with a sophisticated counterparty.
2. The impact of the credit and economic cycles. Shaping the more immediate future, this consideration is permeating all aspects of the industry: influencing underwriting practices, the pricing of risk, and deal structuring. Origination, documentation, and workout capacity are now key points of differentiation for investors when assessing managers and determining the resilience of their business model. On a more fundamental level, performance through the cycle will inform investors’ perceptions of the asset class for years to come.
3. Complexity of investors’ needs. At its core, private credit is about providing investors with access to lending assets in the most direct manner. This is often easier said than done and managing the complexity this entails will shape the industry. As the sector continues to expand, private credit managers are set to continue investing heavily in talent and technology to ensure they can effectively scale their business and introduce greater efficiencies into the lending process.
4. The impact of institutional capital. Investors are seeking more consistent data and greater comparability across their portfolios. Their appetite for a more homogenized approach is likely to be felt most keenly in relation to risk management, portfolio monitoring, and reporting requirements. The extent to which industry norms can be manufactured in a diverse market like private credit remains an open question, and it is likely there will be some adaptation from both managers and investors as this trend plays out across the industry.
5. Transparent engagement with investors and policymakers. The final, and arguably most important, factor shaping the industry, establishing better sources of market data – alongside appropriate performance and risk metrics – is necessary to demonstrate the value of private credit to investors. This will also support the development of regulatory policy based on evidence and data, rather than one based on sentiment influenced by late-cycle dynamics. In this regard, the ACC will continue its engagement with policymakers and other key stakeholders to ensure that the conversation around private credit focuses on what matters most: the role of the asset class in driving economic growth and delivering value to its investors.

[1] https://acc.aima.org/resources/research/financing-the-economy.html

This article is taken from the 2020 Preqin Global Private Debt Report. For more expert commentary on the private debt industry, please visit: preqin.com/gpdr

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