Private debt in a frenzy?

11 March 2020

The FT reported last week that a perceived boom in private debt is turning into a frenzy with the asset class in “bubble territory”. Assets under management have reached a record $812bn in 2019, with an expectation that this will reach $1tn within the next year.

They report that dry powder in private credit is at $112bn and that fierce competition among lenders has led to lower returns and weakened terms.

Whilst it is true that direct lending has been booming, with many funds closing above €1bn in 2019, this is indicative of investor confidence in private debt. The risk weighted return against other asset classes is clearly an attractive proposition for investors.

It is also true that competition has been fierce, but this has resulted in new and a more diverse range of product offerings and bespoke debt solutions for borrowers. The private debt market is still relatively young (having emerged properly post the 2008 crash as the banks withdrew). We are now seeing the private debt market maturing and adapting with both market conditions and increased competition.

The product range and service provided by direct lenders has also been welcomed by the borrower community. Direct lenders have been the lenders of choice in recent years in the mid/upper mid-market. As competition has grown, direct lenders have differentiated themselves by offering unrivalled speed of execution, truly flexible debt products and a strong focus on relationship lending.

The market is perpetually predicting the end of the current credit cycle and speculating how the landscape will differ with direct lenders as key players in the market. With differing regulatory requirements to bank lenders and vast amounts of capital to deploy, the market is hopeful that direct lenders will provide financial stability and not cease lending if challenging market conditions were to occur.

Private debt is certainly ramping up in terms of investor support, but this year we expect to see an increased diversity of product offerings, strong relationship lending and continued growth in market share.