Prudent Private Credit Funds Supporting Businesses in a Challenging Market

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22 November 2022 - A new report finds that private credit funds report continued growth and deployment opportunities in 2022 and expect this to continue in 2023.  Financing the Economy – published by the Alternative Credit Council (ACC), the private credit affiliate of the Alternative Investment Management Association (AIMA), in partnership with Allen & Overy, finds this sentiment underpinned by the following trends:

Q3 2022 hedge fund letters, conferences and more

• Borrowers are prizing certainty of execution and flexibility of terms in the current environment

• Private credit funds continue to expand their lending activity in terms of size, balance sheet positioning and geography

• Increased deal flow despite the slowdown in M&A activity as other liquidity providers retrench

• Floating rate products are proving attractive to investors during this period of rising interest rates

The ACC’s Financing the Economy research draws on data provided by 50+ private credit fund managers, representing an estimated US$800 billion private credit assets under management, and interviews with 17 industry leaders.

The research also highlights the impact of inflationary and economic pressures on private credit funds’ lending activity. While private credit lenders grew their lending activity by around 20% in 2021, macroeconomic risks are expected to test the sector’s ability to maintain this growth.

Private credit funds are employing greater selectivity when deploying capital to focus on businesses in non-cyclical sectors, and those with strong cashflows and the ability to retain pricing power. Robust risk management processes are manifesting in tighter lending terms across deal pricing, lower levels of leverage, and tighter covenant protections.

The report shows that more than half of credit fund managers expect senior positions to offer the highest risk-adjusted returns over coming years.

Concerns about economic environment are also seeing greater emphasis amongst investors on due diligence, documentation, and workout capacity, with investors increasingly using these factors to differentiate between different managers and allocate capital.

While market volatility and the denominator effect have affected capital raising during 2022, the report finds that investors continue to develop dedicated private credit allocations, with growing interest in mezzanine and distressed strategies among investors.

Jiří Król, Global Head of the Alternative Credit Council, said: “Private credit lenders have adapted their approach to the new macroeconomic environment this year. What is heartening is that they have continued to extend much-needed capital to businesses at a time when traditional lenders have retrenched. Their support for growing sectors of the economy makes this investment more vital as businesses deal with the challenges presented by inflation and broader macroeconomic headwinds.”

Hannah Gates, Partner at Allen & Overy, commented: “This report clearly shows that the current economic turbulence seen around the world is putting the stability and flexibility offered by private credit funds in the spotlight. It’s encouraging to see the growth potential expected not only in corporate lending in the UK and US, but across products, strategies and geographies. Despite the more challenging market conditions, the pressure to increase ESG focus remains a top consideration and there is no sign of that abating in the coming 12 months.”

The paper includes contributions from the following leading private credit managers:

  • Allianz Global Investors
  • Arcmont Capital
  • Ares Credit Group
  • Beach Point Capital
  • BlackRock
  • Blackstone
  • Carlyle
  • Cheyne Capital
  • CVC Credit Partners
  • Hauck Aufhäuser Lampe Privatbank AG / Kapital 1852
  • Hayfin
  • ICG
  • KKR
  • MV Credit
  • Oak Hill Advisors
  • Tikehau Capital
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