Emerging themes in the Private Credit space post COVID-19 – A compelling growth story!
What is specialised financing?
Specialised lending is a tailored capital solution that predominantly targets a set of asset classes or sectors. Continued growth in the private credit space and the changing socio-economic landscape have prompted managers to shift their focus from the traditional “business as usual” to something that initially was nuanced but is now becoming the next big thing. Specialty lending, sustainable impact-/ESG-focused opportunities and NAV financing are some of the offerings that have gained relevance recently. Managers have amassed larger commitments, as these offerings are stable and have forecastable income flows with relatively lower risk. These new niche areas are set to become well-established platforms within the private credit space.
1. Specialty financing – the next generation of private credit lending
What is specialty financing? Simply put, specialty finance is a financing activity that is largely asset- or revenue-backed and can be broadly bucketed into three categories:
2. Sustainable/impact/ESG – offerings for a changing world
With the world’s largest institutions (both public and private) pledging to back the energy transition, another noticeable trend within private markets is the launch of new funds and strategies that are ESG- or impact focused. Many private equity (PE), infrastructure, private credit, venture capital and even hedge fund managers are actively seeking capital for these dedicated strategies
What are ESG-/impact-focused funds? An “environmental, social and governance (ESG) fund” is any investment vehicle for which the fund manager uses ESG criteria to inform its composition and asset-allocation strategy.
3. NAV financing – a new niche
Apart from the sector-oriented mandates, asset managers are benefiting increasingly from NAV financing to improve fund returns or achieve other objectives.
Expansion into other regions
Private debt markets have witnessed rapid growth over the past decade, and North America has by far emerged as the dominant region within this space. Preqin expects AuM in this region to reach USD1.4tn by 2027, growing at 21.7% from 2021 to 2027. North America is projected to outpace the rest of the world, with stronger AuM growth than the global average of 10.8%.
This would be driven mainly by the region’s strong economy and asset allocators’ preference for the US over other geographies. Despite the fear of recession, factors such as market depth, liquidity and maturity in an uncertain macro environment are expected to drive strong AuM growth in this region. The region is home to the bulk of fundraising activity, and Preqin forecasts fundraising for North America-focused direct lending funds to grow at a CAGR of 6.8% – to USD110bn by 2027 from USD74bn in 2021.
That said, the asset class (private credit) is gaining momentum in other parts of the world as well. Another major geography for private markets is Europe, where AuM is estimated to grow 10% annually, to USD636bn in 2027 from USD359 in 2021. As in North America, direct lending is expected to dominate in Europe as well, growing to USD415bn in 2027 from USD209bn in 2021 and accounting for 65% of assets in the region. However, the challenging economic conditions and the Russia-Ukraine war are expected to affect investor appetite, and fundraising in Europe is forecast to grow at just 2.6% annualised from 2021 to 2027.
How Acuity Knowledge Partners can help
Our private debt/credit support vertical offers a number of services to private debt/credit middle and back offices; these range from deal origination and target screening to portfolio-monitoring services. We also provide private credit managers with live deal support including due diligence, relative valuation, and scenario and bond yield analysis.