I wanted to post this here as I think it has a lot of insight into the overall landscape of private credit, where it fits, and how it’s changed.
Released in 2019, it’s an interesting look back to three years ago – and a remind of how much has changed.
I pulled out a couple of highlights below, but I’d review the first section specifically for a deeper look into how all this works and a reminder and insight into the process of securitization, etc…
Private debt has only recently been considered an asset class in its own right, and the term covers a range of different investment styles and strategies. The term ‘private debt’ is typically applied to debt investments which are not financed by banks and are not issued or traded in an open market, while the word ‘private’ refers to the investment instrument itself and not necessarily the borrower – i.e., public companies can borrow via private debt just as private companies can. Private debt falls into a broader category termed ‘alternative debt’ or ‘alternative credit’, and is used interchangeably with ‘direct lending’, ‘private lending’ and ‘private credit’.
- The total volume of institutional assets under management allocated to private debt is estimated to be around US$638bn globally. Roughly US$107bn of new capital was raised by private debt funds in 2017 globally4, of which US$67bn was raised by funds in the US, US$33bn by funds in Europe, and USD$6bn by funds in Asia
- Pensions, endowments, and foundations most focused on investing (50% of the pie)
- Infra, CRE, Tech, healthcare most popular industries
Private Debt Market
- The secondary market for private debt is both nascent and, given the lack of liquidity in the private debt market, relatively small. Nonetheless, secondary market investors may still consider the ESG profile of borrowers in the same way as a primary debt investor would. The challenge for secondary investors will be the even more limited access to ESG information and management than is faced by primary lenders. Secondary deals will typically mean fewer opportunities for investor engagement with the borrower.
- Similarly, the capacity of an investor to conduct detailed due diligence is most likely less than for a primary deal, due to less access to company management, and must instead be partly reliant on the primary investor’s due diligence. Aligning ESG expectations with the primary debt holder and/or sponsor can help to ensure that secondary transactions meet predefined minimum requirements.
Among the challenges identified by interviewees, perhaps the greatest is the lack of objective, consistent and timely publicly available data on private companies.