JENNIFER HILL for Citywire Wealth Manager, 2 May 2024:
Private equity houses expanding into lending segments vacated by the banking sector following the global financial crisis have supercharged growth in private credit and given investors greater access to an increasingly diverse opportunity set.
Private credit is now the second largest private market strategy by annual fundraising after private equity, having overtaken venture capital, and its current growth rate surpasses that of private equity, according to specialist private markets and alternative investments firm Connection Capital.
Wealth platform Eurazeo expects growth to accelerate further as banks across Europe, particularly in the Nordics, continue their retreat. Gravis Capital Management points to a Preqin forecast for the private credit market to double over the next five to ten years from its current $1.7 trillion, with Europe expanding the fastest..
In an increasingly competitive market, with investors clamouring for the same types of assets, is there a risk of returns getting squeezed?..
Monetary policy could also pose a glitch to performance. Higher interest rates have given greater scope for compelling risk-adjusted returns but also resulted in higher borrowing costs for companies.
Looking further ahead, higher default risk is also associated with a lower interest rate environment, which could lead to reduced lending standards and force managers into riskier investments to generate returns..
Private closed-ended vehicles typically price quarterly and give investors good visibility on cash flows and returns with capital getting paid down as loans mature. They are easy to access with a minimum ticket size usually in the £1-5 million range.
Investment trusts have a much lower entry level and provide daily pricing. However, the disconnect between the share price and net asset value can hamper growth, especially when a fund trades at a significant discount for some time.
James Carthew, head of investment companies at QuotedData, attributes shrinkage in the private debt part of the investment trust universe to comparatively poor returns on older loans made when interest rates were lower and the occasional bad debt.
‘The best opportunities are in areas that the banks are less keen to lend to – more complex businesses,’ he said.
Read more here