‘Keep a close eye on private credit’ – Dechert

November 15, 2024 (Preqin News) – Private equity firms are attracted to the agility and sustainability of private credit to finance deals.

Almost two-thirds (63%) of fund managers globally are using private credit for acquisition financing at the portfolio level, according to Dechert’s ‘Global Private Equity Outlook 2025’.

The London-based law firm surveyed 100 executives at private equity firms with $1bn+ AUM across North America (45%), EMEA (35%), and APAC (20%) about the challenges and opportunities for 2025.

The use of private debt finance is most prevalent in the APAC region (75% of respondents), which is somewhat surprising given the relative immaturity and small size of the private credit market, which had AUM of $84.1bn as of March 2024, according to Preqin Pro.

The much larger North America market, which has AUM of $966.2bn, is next with 64% of fund managers using private credit finance, and EMEA at 54% (AUM $467.7bn). Almost two-thirds of private equity firms globally are using private credit at the portfolio level for refinancing and recapitalizations (62%), followed by general corporate borrowing (47%), and NAV facilities (41%).

‘The appetite for private credit remains strong across the product range currently being made available,’ said David Miles, Co-Head of Global Leveraged Finance, Corporate and Securities. ‘With a hopefully reducing interest rate environment approaching and an improving M&A market, it will be interesting to see how private credit deploys relative to other financing solutions.’

Interest rate cuts at major economies worldwide have begun to ease concerns about fundraising and exits, raising hopes of a general increase in debt market liquidity, with 68% of respondents expecting a fall in the proportion of deals financed with private credit next year. Nearly three-quarters (71%) of North America-based respondents expect to use less fund finance, followed by the EMEA region (66%) and APAC (65%).

The re-election of Donald Trump is set to spur private credit opportunities in the US. The Republican President-elect stood on a mandate tax cuts for corporations and wealthy individuals, as well as a 20% blanket tariff on all imported to the US and a 60% tariff rate on Chinese goods, according to Reuters.

Most fund managers (81%) in North America are concerned about these tax policies, which could potentially lower consumer confidence and consumption.

‘It's also striking that 85% of PE firms are concerned about increased regulatory uncertainty under President Trump, who has previously stressed the importance of reducing red tape on large parts of the business sector,’ the report said.

Globally, optimism is scarce, with market conditions for private equity liquidity events expected to remain challenging into 2025. In North America, 16% of respondents expect conditions to be very unfavorable, while 40% said they would be somewhat unfavorable. No North America-based fund managers believed liquidity conditions would improve, with the remaining 44% adopting a neutral stance.

Fund managers in APAC take an even more pessimistic view, with 30% believing that conditions would be very unfavorable, 60% somewhat unfavorable, and 10% neutral.

EMEA stands out as the only region with a hint of optimism, with 3% of fund managers believing conditions will become somewhat favorable. Just over a quarter of EMEA-based managers remain neutral, 48% expect conditions to be somewhat unfavorable, and 23% believe they will be very unfavorable.

The biggest liquidity barrier for fund managers is securing a buyer willing to pay the desired valuation, which scored 40% across all markets. This was followed by finding a buyer equipped to grow the company further (33%) and the ability to IPO portfolio companies (23%).

‘This year’s somewhat downbeat assessment on liquidity events may prove overdone. PE firms will certainly hope that is the case. For now, the concern over exits is hindering their ability to return capital to investors; that, in turn, threatens to block the PE sector’s lifecycle,’ the report said.

Despite a relatively gloomy outlook for 2025, Dechert highlights four key factors that will empower fund managers: focusing on thriving rather than just surviving; maintaining a close watch on the private credit market; keeping up with the democratization of the market; and monitoring exposure on China.

_{The opinions and facts included within the above do not constitute investment advice. Professional advice should be sought before making any investment or other decisions. Preqin providing the information in this content accepts no liability for any decisions taken in relation to the above.}