Private credit firms set to finance $100bn in loans this year

The Alternative Credit Council (ACC) in its annual survey estimates that private credit managers will have provided $100 billion in financing to small- and mid-sized businesses over the course of 2020. This is generally on par with the lending volume in 2019 and this year’s survey shows that non-bank lenders have continued to provide finance to businesses, despite the economic downturn and disruption caused by COVID-19. “Private credit managers have stepped up and proved their value in 2020 by continuing to support existing businesses and lend to new projects, despite the substantial disruption in the economy,” said Global Head of the Alternative Credit Council Jiří Krόl. “Private credit provision will drive the recovery in the mid-market sector as traditional sources of finance will continue to retrench.” Early signs point to the industry passing an important structural test, according to Krόl. Yet more than 80% of ACC survey respondents are either somewhat bullish or very bullish about their appetite to deploy capital over the next 12 months. According to the ACC the prevail view is that private credit as an asset class is relatively well placed to continue performing, irrespective of whether the economy recovers quickly or experiences ongoing and potentially more substantial turmoil. ACC’s research shows that the sector also remains optimistic about its prospects and it is likely that similar amounts of capital will be deployed during 2021. The group surveyed 49 private credit managers handling a combined $431 billion in AUM. These trends are the backdrop for continued investor zeal as well as allocators seek out income generating assets and a hedge against the economic uncertainties of that have made headlines this year. Private credit managers continued to raise capital effectively during 2020, with newer funds largely being an evolution of existing strategies. The ACC data indicates that respondents expect the momentum to continue and investor attitudes will remain broadly positive towards private credit. A total of 88% of firms are planning to continue raising capital for existing strategies and 98% of respondents plan to raise capital in some form next year. Meanwhile, 89% of respondents expect more allocations to distressed debt strategies. Strategies focusing on infrastructure debt (52%), speciality finance (50%) and SMEs (45%) were also viewed very favorably by respondents. By region, respondents were most favorable towards Europe, the US and APAC (excl. China and India) focused strategies. The examples of investments being put to work by firms are numerous. ACC highlight the work of Cheyne Capital, which provided a £75.5 million whole loan to support London Residential Development financing for the redevelopment of a former fire station into a predominantly residential scheme, comprising 199 apartments. The developer will also deliver a secondary school and sports hall as part of the agreement with the Local Authority. In the U.S., they used the example of Apollo Global Management. which made a structured investment in US Wind Inc, an offshore wind energy development company. Apollo Funds have committed to invest through convertible debt and equity up to $265 million to acquire an equity stake in US Wind and fund development and construction costs associated with a major offshore wind energy project off the coast of Maryland. Existing exposure to cyclical or COVID-affected sectors is also affecting a private credit manager's ability to take advantage of investment opportunities during the current downturn. These factors are likely to drive dispersion of performance within the sector during the rest of 2020 and into 2021. Performing loans in the SME and mid-market are expected to be the biggest opportunity to deploy capital in 2021, with the sector also anticipating greater investment in liquidity/bridge finance or special situations lending. “We are increasingly seeing direct lenders being considered by borrowers and sponsors alongside underwritten and bank club financings,” said Sanjeev Dhuna, partner and head of the direct lending practice as London-based Allen & Overy, which sponsored the report. “The direct lenders offer speed of execution and certainty of pricing, and in recent months we have seen these lenders play in the structured financing market, offering liquidity for delayed exits in order to return cast to investors.”

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