Private credit popularity set to reach new heights in 2021

Private debt has been growing in recent years but the expectation is that 2021 will be a strong, if not record, year for the asset class. Market fundamentals and research already point to healthy sector growth, but Intertrust Group believes that private debt could exceed expectations as firms capitalise on demand from borrowers for alternative forms of competitive financing.

Edwin Chan, Director, Business Development, EMEA, for Intertrust Group’s funds division, says: “Private debt is a growing asset class and Intertrust Group is well positioned to support clients across every aspect of the private loan lifecycle as well as fund administration. The market has historically focused on Europe and the US but we expect Asia-Pacific interest to grow too – we are already seeing, for instance, local pension funds looking at it as a viable asset class offering attractive yields.”

“While banks are still lending, demand for borrowing is much higher than in previous years, particularly among SMEs. There is a clear need for more lenders, particularly with regards to short-term loans and cash flow. Private debt firms have stepped in to cater for this demand.”

Chitra Baskar, Chief Operating Officer and Global Head of Funds & Product at Intertrust Group, adds: “In terms of growth, we do see private debt as benefitting from very strong tailwinds as we move into 2021, and over the next few years. Private debt has shown constant growth – banks are proving that they are not very keen on some areas of lending and are cutting down on some books.”

Greater complexity

According to a report from Preqin published in November, private debt is expected to be one of the fastest-growing asset classes, with AUM increasing at a CAGR of 11.4% over the next five years to $1.46tn by 2025. In a low interest rate environment, investors will be attracted to high single-digit returns, said Preqin; its data shows a horizon IRR of 8.8% over the 10 years to 2019 – though this strong historical performance may be difficult to match, it adds.

A third of all private fund managers surveyed by Preqin said banks will be ‘less’ or ‘significantly less’ important as debt lenders over the next five years. However, a quarter expect them to be more important.

As private debt grows in size, managers will increasingly be faced with greater operational complexity in a highly regulated sector. Mr Chan at Intertrust Group continues: “Private debt strategies and portfolios can require highly sophisticated models and, as such, managers increasingly need support in areas such as reporting, customisation, IT and due diligence. Our tech-enabled, client-centric suite means we will see more outsourcing in 2021.”

Jonathan White, Commercial Director – Funds at Intertrust Group, adds: “Private debt managers suddenly find themselves facing more lending complexity. While many have been able to tolerate operational pain internally, this is no longer feasible, and the requirements around credit means outsourcing becomes much more natural.”