Pensions, endowments, and other allocators are driving the economy through private credit managers.
According to a study released today, institutional investors represent the majority of the $1 trillion expected to be in the hands of private credit managers by 2020. Such firms have been financing mid-market companies for a decade after banks dropped out of the market post-2008. But laden with institutional capital, they are increasingly lending to some of the largest corporations in the world and have become a massive determinant of economic growth.
Seventy percent of private credit capital now comes from institutional investors, according to the research from the Alternative Credit Council and law firm Dechert.
Many private credit managers are thinking through what happens when the current credit cycle ends and companies face a more difficult economic environment.
“While the fundamentals driving the growth of private credit remain strong, the factors supporting that growth are facing several tests,” wrote the report’s authors. “The market remains extremely competitive with private credit managers working ever harder to compete for deal flow. This dynamic is evident in the continued pressure on deal terms and the growing use of leverage in some parts of the market.”
Even so, a third of managers surveyed said they will increase lending to middle-market companies over the next three years. About two thirds use fund structures that prevent investors from reneging on capital commitments during tough times. The authors of the study believe the structure helps steady the economy as borrowers can rely on getting access to funds even if economic conditions change.
[II Deep Dive: Private Credit Will ‘Crush’ The Next Downturn, Alts Manager Says]
Nearly a third of all capital invested supports non-corporate lending strategies, including asset-backed finance, trade finance, receivables, real estate, and distressed, the trade group and law firm’s research found.
It’s a borrowers market. They have a choice of lenders and power when negotiating, according to the report. Eighteen percent of respondents said arrangement fees have fallen over the past year, while only 4 percent say they have increased. The remainder reported fees holding steady. In addition, twice as many respondents said financial covenant protection weakened versus strengthened over the past year.
The study comes as global policy makers continue to debate the risks and potential benefits of the shift in lending from banks to investors. Regulators have often referred to the new regime as ‘shadow banking,’ because private credit managers are not subject to the same rules as banks once were, arguing that transparency has declined.
The authors of the study were quick to point out that organizations such as the Financial Stability Board are showing support for the new lending regime. Their jargon is even changing.
The Financial Stability Board has said it will no longer call lending through private credit managers, ‘shadow banking,’ and will instead refer to the new lending class as ‘non-bank financial intermediation.’