REPORT PREVIEW:
US and European private credit markets are primed to seize opportunities created by deglobalization, which is accelerating calls for capital as countries push toward greater self-sufficiency and policymakers ease the way. But rapid new growth also increases risk around market interlinkages, competition, leverage and transparency.
- The call for capital is growing as regulations evolve. Deglobalization and technology innovation are accelerating demand for new capital formation as some regulators and policymakers respond with more accommodative rule making to expand private credit access. But growth will also necessitate that regulators be able to monitor risks amid relative opacity, illiquidity and increasing interconnectivity. These challenges come amid heightened geopolitical and economic challenges.
- Europe, with its lower growth base, is primed to grow faster than other markets. The depth of European capital markets has long trailed that of the US primarily because of different regulatory and legal regimes. But with growing political urgency to ramp up spending on critical infrastructure, private credit will increasingly be used to bridge funding gaps. While it will take time for the investor base to deepen and for new forms of origination and asset types within securitization to take hold, global alternative asset managers are getting ready to seize opportunities as they ramp up across Europe.
- Financial innovation brings greater complexity while addressing demand for investment grade assets. Financial innovation and securitization are helping asset managers address demand for higher-quality assets. While important in addressing such demand, innovation can also introduce more complexity via leverage and structural features. Securitized tranches offer diverse risk-return profiles, accommodating the needs of various end users.
- Credit risk is growing. Deglobalization, energy transition and AI are fueling demand for more capital – but at a time when credit conditions are worsening. Private credit and regulated bank competition for quality assets will intensify while leverage, valuation and transparency will remain key risks.