PRIVATE CREDIT INSIGHTS - GLOBAL
Executive preview:
Private credit's ability to grow in the face of market turbulence will be tested anew as volatility persists and public market access contracts. As this happens, we expect lower rated companies to lean more heavily on private credit lenders for financing support, similar to what happened when credit markets contracted on the heels of the pandemic.
- Eying opportunities and bracing for the next big test. While private credit's market share has continued to accelerate through downturns, growth will not come risk-free. For instance, fewer deals will mean more growth in net asset value (NAV) loans, which provide liquidity when leveraged buyout (LBO) exits slow. Performance will also be tested as LBOs struggle in a deteriorating economic environment
- Bank lending to private markets points to high borrower concentrations. US banks have significantly increased their share of lending to non-bank financials – representing 11% of loan book for the top 25 US banks in 2024 compared to just 4% a decade ago. The smaller US banks have a much smaller exposure relative to their loan book, but they are growing it rapidly.
- Data infrastructure will help fuel ABF growth. Demand for asset-backed finance (ABF) has been fueled by demand for infrastructure such as data centers and fiber networks. While data center debt issuance in the ABF market was very strong this first quarter, market turbulence may slow momentum.
- Insurance will continue to increase private credit exposure. As volatility grows, private credit's allure will also grow for long term investors such as insurance, an industry better built to weather cyclical storms. Even without volatile conditions, we expect more life insurance companies will continue to leverage the expertise of alternative asset managers to grow their private assets while these same managers will grow their footprint in insurance to build market share.
- US regulatory pressures will ease. As policy priorities of the second Trump administration take shape, regulatory efforts such as reporting requirements will likely be toned down. If anything, the focus will shift more toward facilitating capital formation, including expansion of retail investor access to private markets, and modernizing the existing regulatory framework.
- Private credit will continue to attract new players. However long volatile conditions persist, it seems likely that private credit will continue to attract more participants eager for higher-return opportunities. A the same time, a recession would weigh heavily on asset quality just when regulatory oversight is dialing back – which will put increasing importance on the long term capital funding critical to stability in this still-opaque sector.