Private equity GPs expand usage of private credit loans – S&P

May 9, 2024 (Preqin News) – Most investors (88%) with an AUM over $5bn plan to increase their private credit allocation in the coming year, more than double the proportion of smaller LPs increasing investment in the asset class (42%) over the next 12 months, according to S&P Market Intelligence.

In the 2024 Private Equity and Venture Capital Outlook, the financial information giant’s research arm finds that private credit strategies are increasingly used by GPs as a viable alternative to bank financing, with 37% taking loans from private credit institutions in 2023.

The use of private credit is split among regions. More than half of GPs in North America and the MENA region have expanded their use of private credit loans (55% and 58, respectively), although this figure drops to just 8% in APAC and 24% in Europe – due to the regions’ maintained reliance on syndicated banks.

‘We are pleased to see that despite macroeconomic challenges still lingering, the industry remains adaptable and poised for growth throughout 2024,’ said Thomas Mercieca, Associate Director at S&P Global Market Intelligence and lead author of the report.

Over half (51%) of private equity fund managers believed that the biggest challenges in deal closing last year were valuation volatility or misalignment between buyers and sellers. This was followed by a lack of capital to pursue attractive deals (16%) and reduced opportunities in their target sector (12%).

Deal activity is now tracking at similar levels to 2018–2019. In the first quarter of 2024, the aggregate total for 1,780 deals was $94.7bn – only 10 transactions fewer than in Q1 2019, but aggregate deals previously totaled a much greater $153.5bn, according to the Private Equity Q1 2024: Preqin Quarterly Update.

‘Private markets have begun recovering from the early 2023 slowdown, but prolonged higher-for-longer rates might hold up this recovery,’ said Preqin’s Victoria Chernykh, AVP, Research Insights, and author of the report.

According to S&P, the record amount of private equity dry powder is also a cause for concern among GPs, with 39% of respondents believing that deal competition will be stronger than usual. For fund managers with over $10bn in AUM, the biggest concern is slow fundraising, as capital is already available to deploy, and investors often wait for distributions from their investments before reallocating capital.

Most investors (70%) agree that secondary fund restructuring provides liquidity opportunities that will benefit their organizations. Last year, secondaries fundraising hit a record $93.8bn, a 159% increase from 2022. As reported by Preqin News last month, LPs indicate that the strategy is the most attractive investment opportunity in the next 12 months.

_{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.}