Private Credit: Transition Beyond Conventional Banking

Aug. 16, 2024 - PRLog -- "The banking sector accounts for 90% of corporate funding in emerging markets vs less than 40% in the US, creating opportunities for international expansion," according to a soon-published research report by M Capital Group - MCG.

The report, "Private Credit – Private Taking Over Public," reveals that private credit is expected to reach nearly US$1.7 trillion by 2024, a substantial increase from an estimated US$1.0 trillion four years earlier.

According to MCG, the growth of the private credit markets is driven by several key factors. The increase in deal sizes, evidenced by multiple recent transactions exceeding US$1 billion, reflects greater investment confidence in private credit. The rise of BDC, fueled by tax advantages and enhanced liquidity, has increased AUM from US$134 billion in 2020 to US$271 billion in 2023, thereby enhancing liquidity and financing options. Stricter banking regulations, a significant rise in insurers' investment, many of whom plan to boost their allocations to private credit and the entry of High Net Worth Individuals are all contributing to potential market growth.

Family offices and high-net-worth individuals are also driving the demand for private credit. According to estimates by MCG, the local private credit segment—excluding warehouse financing—has surged by over 45% since July 2019, outpacing the 25% increase in traditional bank credit over the past five years. Asia leads the trend with 74% of family offices reporting exposure to alternative investments.

Strong underwriting fundamentals have also evolved, with only 20% of direct lending deals classified as "covenant-lite," compared to 90% in syndicated loans, indicating that private credit remains committed to risk management and providing lender protection while offering enhanced returns.

The emerging economic growth of emerging economies across the Asia-Pacific region has created demand for capital and cross-border financing. Asia's dynamic SME also plays a crucial role, with SMEs comprising over 96% of all businesses in the region and employing over 55% of the workforce, according to the Asian Development Bank.

Private credit faces several challenges, including the rise of Payment-in-Kind arrangements, a lack of borrower commitment, and lower default recovery rates. As the private credit markets expand, the sector is also bugged by loan overvaluation and a lack of transparency in valuation methodologies, with only 40% of U.S. funds currently reporting data to the SEC.

Christian Mouchbahani, Managing Partner at MCG , envisions "a positive outlook for the private credit markets, driven by its flexibility, customizability, and attractive investor-risk returns of over 10%, compared to other asset classes, while addressing borrowers' needs and demand. These trends and favorable conditions present opportunities for investors, lenders, and borrowers alike."