Why private credit is here to stay

A more diversified lending mix

Acknowledging the importance of private credit in today’s lending landscape, many have already pointed to the multi-faceted role that private credit could have in the rebuilding of economies in a post-pandemic world, particularly having demonstrated its resilience and adaptability during 2020. Private lenders and alternative providers of capital have also proved their mettle to a range of borrowers including SMEs, having proactively worked with them to navigate a turbulent business environment – with the pandemic underscoring the strength and value of relationships and partnerships in the private world. 

“This is just one instance of policymakers looking to push long-dated liabilities into long-dated assets with the promise of long-dated income streams in return.”

Looking to the long term

In the eyes of officials, encouraging a more diversified (and less bank-reliant) lending landscape to form in Europe – akin to the US – has its advantages.

From a financial stability standpoint, policymakers are acutely aware that provision of credit by banks to corporate borrowers is risk capital from customer deposits. While governments and policymakers have been open to removing existing barriers to investment and enabling greater investor access to long-term assets, others have urged caution. The Financial Stability Board and various rating agencies have expressed their concerns about potential risks building in the private credit industry, citing opacity, eroding standards and rising leverage amid the influx of investor capital into private markets in recent years.

At the same time, recent rhetoric suggests governments are looking to ignite an “investment Big Bang”. The UK Government recently called on pension schemes and other asset owners to support the economic recovery by investing a greater proportion of their funds into UK long-term assets like infrastructure projects, and other long-term growth prospects like tech start-ups – typically backed by venture capital and increasingly being snapped up by private equity buyout firms. This is just one instance of policymakers looking to push long-dated liabilities into long-dated assets with the promise of long-dated income streams in return.

It is also clear that debt-laden governments recognise a potential alignment of long term, (non-bank) private capital in helping to finance many of the long-term changes needed to move to a greener and more sustainable economy for current and future generations.

Opening up greater access for investors

Another important investment trend is the democratisation of private assets, given the appetite from a wider set of investors for access to private market opportunities. To support this, there is a clear need for innovation in funding and regulatory models.

The European long-term investment fund (Eltif), a closed-ended structure and framework largely restricted to European investments, was launched in 2015 with the aim of democratising asset ownership. In a similar vein, the UK Government is supporting the creation of the open-ended Long Term Asset Fund (LTAF) that would allow professional and retail investors to diversify beyond traditional listed asset classes like equities and bonds – into long-term, illiquid assets. The idea is that by adjusting fund structures, and making them more flexible, to allow the holding of long-term private and illiquid assets, the defined contribution (DC) savers of the future can participate in the rebuilding and reshaping of economies – and potentially benefit from the illiquidity premiums of long-term illiquid assets.

There are many things that the regulators and various governments would also like to do because there is an understanding that because an asset is private, and often illiquid, that does not necessarily render it unsuitable for pension schemes. In other words, pensions function as long-term retirement savings vehicles which means they have the investment horizons that enable a natural alignment with long-term investment assets. Assets such as long-term infrastructure, are therefore potentially highly suitable for an individual’s private pension scheme – if they are not going to be able to touch that for the next 20 or 30 years, then having something with a very long-timescale works quite well.

Read more about what could be next for private credit markets in our latest paper:

The views expressed in this document should not be taken as a recommendation, advice or forecast. The value of investments will fluctuate, which will cause prices to fall as well as rise and investors may not get back the original amount they invested. Past performance is not a guide to future performance.