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Alternatives

Private credit market expected to reach $1 trillion by 2020 — report

The global private credit market is set to hit $1 trillion by 2020, with 14-fold growth since 2000, shows research by the Alternative Credit Council.

The private credit affiliate of the alternative trade body Alternative Investment Management Association, along with law firm Dechert, said in its Financing the Economy 2017 survey that should the industry continue to grow at the pace it has set, it will hit $1 trillion in assets in less than three years. As of the end of 2016, assets totaled $600 billion.

A report on the survey said private credit activity in the U.S. remains strong, with the popularity of this market helping to fuel interest in the European and Asia-Pacific markets as managers seek out new growth opportunities, said the report. Germany, the U.K., the U.S., France and Canada were highlighted as the five countries that will offer the biggest opportunities in the sector over the next three years.

Regulatory reforms are also supporting the sector, with the impacts of Basel III regulations and the U.S. Federal Reserve leverage guidelines "likely to offer a further boost" to the U.S. market, said the report. "Whilst some have speculated that the U.S. government may become less stringent in its approach to the banking sector, these regulatory reforms are already baked into the system and are unlikely to be reversed entirely."

The survey said one area of U.S. reform relates to the role of business development companies, which provide finance to smaller American businesses. Legislation underpinning these vehicles is in need of modernizing, said the report, and should changes be implemented, "these reforms would make BDCs an even more attractive vehicle for private credit managers, and we hope that our recommendations are acted upon by U.S. policymakers."

The private credit market is also evolving in terms of the relationship between borrowers and managers, with the latter having to demonstrate more flexibility as covenants and coupon terms shift in favor of the borrower. Almost half of private credit managers said covenants had become less demanding over the past three years, and 14.3% said loan terms have become more demanding. Covenant-lite structures are also in demand, said the report.

The preferred target term for investments is also changing. More than 20% of participants said they prefer a target term of six years or greater, up from about 8% of respondents in the 2015 survey. About 35% prefer a target term of two to four years, the highest rate. A comparison to the previous year was not available.

The report is available on AIMA's website. Sixty private credit managers globally were surveyed, with a combined $500 billion in private credit assets under management.