Full steam ahead: Private credit industry to hit $1 trillion by 2020

By Jiri Krol, Deputy CEO, Alternative Credit Council

Published: 13 October 2017

The Alternative Credit Council’s (ACC’s) latest Financing the Economy research paper, produced in collaboration with Dechert LLP offers further evidence that private credit is now a permanent fixture of the lending landscape. Having experienced a 20% compound annual growth rate since 2000, the global private credit market is on track to reach $1 trillion by the end of the decade. This is no mean feat considering that this rate of growth has not been witnessed by a subset of the asset management industry since the earlier years of the hedge fund industry. Private credit has now established itself around the world as a credible alternative to traditional sources of finance.

Our research highlighted a number of positive features of the private credit sector. SME and mid-market companies remain the biggest recipients of private credit, with one-third of committed capital being used to finance these businesses. Lending to larger corporates is also on the rise - accounting for a fifth of all private credit. As the market expands beyond its traditional mid-market base we also see private credit managers drawing on their expertise and experience to offer specialised finance solutions to particular sectors.

Private credit’s increasing influence in countries outside the US and the UK is also becoming more apparent. Our survey identified Germany as being the most attractive country for private credit managers beyond those two markets, with France and Canada also seen as attractive propositions. The growth of private credit in new markets is partially a consequence of regulatory reform to encourage alternative sources of finance. The ACC will continue to work with policy makers across the globe to encourage further reform and support the sustainable development of private credit. Private credit managers do not appear to be phased by the current uncertainty regarding Brexit with nearly 40% saying it won’t affect their appetite to lend to UK businesses.

Borrowers continue to appreciate the flexibility of private credit and how it enables them to rapidly secure financing on terms tailored to their circumstances. The attractiveness of private credit to borrowers is also evident in the growing trend of repeat business.

Whilst competition in the market is undoubtedly placing pressure on pricing and covenants  several hallmarks of private credit remain unchanged. Private credit managers continue to primarily use closed-end fund structures, the use of leverage across the market as a whole remains modest and lending standards and due diligence remain robust. These results are in keeping with the overall character of the industry: cautious and rigorous in its approach to lending. As the sector matures, this rigour will be an essential ingredient in the sustainable growth of the private credit industry.

These strong foundations mean that private credit is well placed to continue financing businesses, helping them to invest, grow and create jobs around the globe. As stakeholders become more aware of the value of private credit we expect that the momentum generated by private credit will continue into 2018 and beyond.