The Rise of Private Credit: Growth Expectations & Future Evolutions
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The Rise of Private Credit: Growth Expectations & Future Evolutions
June 6, 2024 | 10:15-11:00 AM
SPEAKERS
Tom Lemmon, Global Securitisation Editor - GlobalCapital
Paddy Rath, Partner - Walkers
Jason Brown, Partner - Victory Park Capital
Benjamin Reider, CEO - Levenue
Marta Stojanova, Director - S&P Global Ratings
Neha Khoda, Managing Director, Credit Strategy - BofA Global Research
Suhrud Dagli, Co-Founder – RiskSpan
Shaun Baddeley
Hi, good morning, and welcome to day three. My name is Shaun Baddeley, and I head up the securitization route within AFME. This is the first day that we have had a private credit summit within global abs. And for me, there's a huge logic in doing so on this day, given the substantial overlap between private credit and securitization, I think it's the definition of private credit, which no doubt will be discussed later, covers like securitization is an umbrella term to cover so much, but clearly there is a substantial overlap with securitization, so it'll be interesting to see how today so develops that theme. We the day runs through till two o'clock, so it's a pretty full day, and the conference concludes at 3pm after lunch. So I hope you can stay to the very end and enjoy the day. There's also a future leaders stream running next door for anybody who is interested in doing so. It's the first year that we've done that as well, and I think will be very interesting. Special thanks to Aries management, who is the lead sponsor of today, and they Joel hulsinger is leading a keynote at 1015, so we look forward to that. I think, you know, we have a really interesting agenda today which covers off, you know, a lot of related topics in relation to non bank financing, you know, fund financing, direct lending and asset based financing as well. So I think, yeah, I look forward to hearing what everybody has to say. And we're going to start off, if I can ask Tom lemon from global capital to come to the stage to kick off the first panel on the rise of private credit. And I believe we will start off by trying to define that term, which I think will be very helpful for me, at least so please. Welcome to the stage the first panel. Thank you.
Tom Lemmon, Global Securitisation Editor, GlobalCapital
Hello. Think I think we can sit anywhere. Oh, wait, there's a seating plan. Oh, there is.
Marta Stojanova
I nearly got it. I think I got it.
Tom Lemmon, Global Securitisation Editor, GlobalCapital 2:33
I'll stay up here. 123, well, welcome. I'm Tom Lemmon, the securitization editor at global capital. Thank you for joining this panel. We've got a really full house of experts that will try to sort of demystify private credit and explain what the future holds for the for the sector, and how and how it's going to affect securitization as well. There's so many of you, so why don't we go in a line and introduce ourselves, starting with Neha.
Neha Khoda
Hi, good morning. I know it's bright and early, so thanks for joining our panel today. I'm Neha Khoda. I run loan strategy for BofA global research. I work out of New York, so I'm still jet lagged. I'll do my best. Hi.
Paddy Rath
My name is Paddy Rath. I'm a partner in the finance and Capital Markets team at walkers in Dublin. We work mainly on securitization and structured finance transactions involving Irish section 110 companies. But we also advise a number of asset managers on the establishment of investment structures for various asset classes, including direct lending, loan origination and private credit. Hi,
Marta Stojanova
Good morning everyone, and thank you for joining us on day three of the conference, which I know is a challenge, if history is anything to go by. I'm a director at SNP Global's corporate ratings within the leveraged finance team, but I also sit in the private markets Council internally, which basically aims to bridge the gap between market needs and maintain relevancy for our ratings for the very evolving and rapidly evolving marketplace, which is private markets.
Jason Brown
Hi everyone. I'm Jason Brown. I'm a partner at Victory Park capital. We are US based firm, but operate globally, Europe, Asia, Australasia, really, we are an asset backed private credit fund. We've been around 17 years. We manage about 6 billion or so now through through multiple vehicles, both UK vehicles and US based vehicles.
Suhrud Dagli
Hi. Good morning, everybody. My name is Suhrud Dagli. I'm one of the founders of risk, and we provide analytics and data and securitization management, mostly these days, for private trade markets, for insurance companies, asset managers, working mostly in the asset based financing space. We are. Based company, but our clients invest in US, Europe and Asia.
Boris Redfern 5
Hi, good morning, everyone. My name is Boris Redfern. I'm the Head of Buyside at Levenue. We are a marketplace that operates all across Europe in active in 12 countries, and we originate and source, underwrite and then service direct private credit deals between mostly Ultra net worths, family offices, etc, and SMEs across Europe.
Tom Lemmon, Global Securitisation Editor, GlobalCapital
Aren't you glad I didn't say all that myself? Right? So we hear a lot of terms within private credit. I think we've got asset backed finance, direct mending, specialty finance, nav and fund finance. Can we maybe start with Jason and maybe Boris? If you could chip in as well, sort of go through those a bit in a bit more detail, and try and sort of explain what we really mean with the terms, because I know there's so many, and actually working in the US, I see sometimes we have different terms that mean exactly the same things across different continents. So, yeah, yeah, ensure
Jason Brown
the panel will correct me, and I'm also Australian, which has a set of terms in that market. In the securitization market, there is incredibly different but anyway, so direct lending, I think, is probably the most common, and really the one, the term that's probably been around the longest in my mind. You know, when I look at direct lending, I really break it into two kind of segments, which, which are the largest segments globally, I think, which is the sponsor and the non sponsor. So I think we see a lot of, you know, direct lending funds that are just lending to anything from from small to medium to large sized businesses. And obviously, the larger the business is, the more you know possibility that it's going to get, you know, a rating around it, but, but I look at direct lending really as as as two distinct focuses into a sponsor and non sponsor kind of market. And obviously a lot of, a lot of the sponsors of the conference, I think play, play in both ends. And I think it's a very different kind of underwriting, very different type of structure and leverage profile, you know, that a business gets, obviously, if it's sponsor and non sponsor. And that segment, I think, has really been been around, you know, by far the longest my pride career was at GE for many, many years and, and we, we did a lot of direct lending into the sponsor and non sponsor universe back then, through, through Antares, you know, capital. It's obviously still around, and still quite a, quite a large, you know, large global business. When you look at the asset backside of things. You know, I think you can, you can also, depending on jurisdiction, break it into a lot of different categories, broadly, asset backed, obviously, you know, there is some kind of an asset or a contract that has some kind of cash generating contract that can be underwritten discounted cash flow back. So I think you've got two kind of segments that that are more hard asset versus soft asset in broadly in in asset backed it could, you know, could be IP lending, it could be legal, litigation finance, which is, which is a, you know, smaller niche, growing area. But I think all that as an umbrella fits into asset backed finance, depending on your jurisdiction, you can have a massive ABL focus, asset based lending focus, which is really receivable as an inventory, you know, depending on jurisdictions you know, globally, inventory can might or might not be financed depending on how, how You know legal structures work, but, but actual AR inventory financing is a massive market within broad asset, asset backed financing. So definitely, you know, lot of segments within that. And then you know, we definitely use the term specialty finance often, which, which? You know, in my mind, again, people will jump in. I'm sure in my mind that that means everything from a FinTech business all the way through a company that's just, you know, a credit card lender or a short term consumer lender, or a small business lender or short term real estate bridge lender. That all fits within in the specialty finance kind of umbrella under asset based finance, you know, broadly on the the nav and fun fund finance side of things, I think you have, you know, three broad sectors, the way that we look at it, I think you have, you know, GP financing, which certainly is something I think a later panel will probably talk a lot more about, is something that certainly is available in pockets. And then you have fund financing, which can take the form of financing the fund to get. Capital back to an LP, which is probably something that a lot of people don't like to do, but he's out there. And then you've also got fund financing, which provides just leverage to a fund, enabling them to go out and further invest in other assets, you know, for the fund. So lot of different areas, and I think a lot of lot of us probably play in the in the different areas, in different bits and pieces. But, you know, having, having been in asset backed financing for over 25 years now, gosh, actually, more than that, anyway, it's certainly, you know, certainly seen, you know, a massive rise over the last kind of 10 years, certainly for our firm, into all these different areas, and each of them now have really, you know, grown into very, very significant, you know, asset categories. Thank
Tom Lemmon, Global Securitisation Editor, GlobalCapital
you, Boris, yeah, like, tell him he's wrong.
Boris Redfern
Yeah. Probably want to avoid that, because Jason's been in this business since, they'd probably be, probably get into trouble there. But I mean, obviously asset backed finance is a very broad church, as you touched upon. There's hard assets, you know, auto loans, etc, and bridge financing for construction projects, etc. We obviously are more focused on the more receivables, invoice financing end of the spectrum. Except our business, we expect to see receivables generated by subscriptions and then lend against those. So we are almost, you know, if, as if it were not complex enough, we're expanding those kinds of assets that can be lent against. Definitely, I think that the tech will continue to expand those that pool of assets that we can see being underlying, the kind of loans that we're going to see originating in this space. And then, in terms of fund finance, is not really something that we particularly look at when we want that asset backed end. So, yeah, and
Tom Lemmon, Global Securitisation Editor, GlobalCapital
with, with all of that Paddy, it's, it's very complicated. It needs complex legal structures. You know, many of those actually based out of Ireland. What? Sort of legal structures do you see used or that are more specific to these sorts of strategies?
Paddy Rath
Yeah, thanks Tom, look, Ireland is, you know, a very well established jurisdiction for the establishment of legal structures for, you know, investment in a broad variety of asset classes, including credit. And there are two kind of really competing jurisdictions for that work. That's Luxembourg and Ireland. Both jurisdictions have, you know, have very credible offerings and have kind of sophisticated, kind of service provider ecosystems who are familiar with the product. I'm an Irish lawyer, so I'm going to put on the green jersey now, and that's all you're going to hear about Luxembourg for the rest of the day. I think traditionally, when we looked at legal structures that were used for kind of direct lending or loan origination, you know, in the early days, it was a section 110 SPV that was used the and in those instances, you know, the section 110 SPV might have been funded by kind of one or more offshore funds. The section Montana SPV still works well for direct lending and for loan origination strategies. And managers tend to like it for a variety of reasons, including the section Montana SPV can get access to Ireland's, you know, robust double taxation treaty network. So we currently have 74 double taxation treaties, and that makes the vehicle a very efficient vehicle for lending into double taxation treaty jurisdictions. The other great thing about section 110 SPV is that it's a very cost effective and tax efficient vehicle. So the vehicle can be structured to be effectively taxed flat from a corporate tax perspective, and in and in terms of like ongoing running and establishment costs, it compares very well against regulated fund products or other kind of vehicles in other jurisdictions. We're fortunate that the section 110 tax regime is enshrined in legislation in Ireland, and that means we're not relying on kind of concessionary treatment from tax authorities or tax rulings, and that gives investors and managers great certainty in terms of how the tax treatment of the vehicle will operate once the qualifying conditions of the regime are met. It's also very flexible vehicle, so the section 110 SPV can acquire a broad range of financial assets. And you know, there is no kind of statutory restrictions on redemptions. There are no leverage limits that apply to a section 110 SPV. And you know, generally just it is a flexible vehicle. It's unregulated, which means, you know, there's no regulatory approval process required to set up a section 110 SPV. So that makes the vehicle, you know, very, very quick and efficient to set up. You could be up and running in, you know, in a couple of weeks outside of that, then kind of Ireland has a full, kind of suite of regulated fund products that are available and are used for kind of these strategies. Principle among them will be the Irish investment limited partnership. And then the icav. I'm going to speak more about the icav, because that's the vehicle that would most commonly be used. The Irish icav Is the Irish collective Asset Management vehicle. It is a dedicated corporate fund structure. It's typically established as an umbrella structure with segregated assets and liabilities between sub funds. This is a regulated product, so you will need a regulatory wrapper to go along with that product. And that wrapper can take the form of the Quaife. So the qualifying investor, Alternative Investment Fund, the elkwave, which is a particular type of loan origination, quaif, the usage or the ltiv, the elk wave, again, the elk wave, icav would work very well as a as a as a vehicle for private creditor direct lending strategies, again, for a variety of reasons, many of which are kind of tax efficiencies, so kind of all incomes and gains on the underlying portfolio can accrue in the in the icaf vehicle, free from Irish tax. There's no withholding tax on distributions from the icav to non resident investors, provided that there is a non residents declaration, there are no stamp or other kind of capital duties that apply to issues, transfers or redemptions of shares in an Irish icaf and the Irish icav is a corporate vehicle should have access a tax resident. Irish tax resident corporate vehicle should have access to Ireland's double taxation treaty network, which again makes it a very tax efficient vehicle for lending into tax treaty jurisdictions and including the US, if the requirements of the US Ireland double taxation treaty network or double taxation treaty are met, maybe just also to add that, I suppose the the Irish icav, the loan origination icav, is required to appoint a European alternative investment manager, and that means you can avail of the afmd marketing passport to market product throughout Europe. So that is, again, another kind of very useful vehicle for kind of private credit strategies. And then maybe just a word on kind of some structural evolutions that structural evolutions that we've seen more recently. To my mind, this is the perfect marriage. It is the hybrid icav section 110 company. And so in in with that structure, effectively a section 110 company is incorporated as a wholly owned subsidiary of an icav of an icaf sub fund. And effectively, that's very efficient, because it converts kind of interest income at the level of the section 110 SPV to equity returns at the level of the icav, which, as I said, can be distributed without any withholding tax to non resident investors and minimum tax leakage in the structure. So that's very useful. It's also a very useful structure for accessing the double taxation treaty network, because you have a kind of a robust double tier Irish structure with an Irish section 110 company at the bottom that's subject to tax. So again, very kind of tax efficient vehicle. It also works well for those kind of investing in distress credit, where you're going to realize big gains, and works very well for kind of the recently introduced interest limitation rules in Europe. So in summary, there's a broad suite of vehicles I've only touched on two I could talk about tomorrow, but I probably should let someone else have a turn.
Tom Lemmon, Global Securitisation Editor, GlobalCapital
Well, you know, these these things, as they grow, they need ratings. They need to be properly understood. Martha, that's your sort of realm, I know, with sort of private credit. Clos, for example, we've had, it's they. You know, in the US, they've grown quite a lot, but it's also been very difficult to have them. We've had any in Europe, we haven't had any. So we've had discussions, yes, and part of that difficulty is from the rating side. So what's really important for you? Yeah,
Marta Stojanova
I mean, if we think about what ratings represent and what is the reason behind it, the key sort of driver is the need for transparency. Private Markets have become literally half of the non banking investment funds available out there, and that's about 10 to 12 trillion, although the number depends on who you ask, and certainly private market to private credit is about 1.31 point 5 trillion, again, depending on who you ask, and some estimates are actually higher. So the relevancy for transparency in this marketplace has actually grown over time, and it actually will increase as there's more and more interest in terms of, you know, broadly speaking, everybody knows what the asset back rating methodologies is, so I won't touch about that. But what brings us here today is the private markets, and essentially in within s&p ratings, we have two fundamentals. Criteria to tackle the main drivers of the main investment vehicles that are behind this increased demand. The first bit is actually the second bit Jason mentioned, which is the nav financing and the sublines and the feeder funds. We've actually had criteria on this since 2006 it has been in use. It started with public equity markets, then it moved into private equity markets, and then increased to other exposures, like venture funds, hedge funds, et cetera. And the key sort of interesting bit about that criteria is it has two components of it. It's a more holistic approach than what you would expect in clo mid markets, and I'll touch upon that a bit later. This is a more holistic approach, because very often these funds get established with no assets. So it's all to do with the manager and the track record of the manager, the style of the manager, and the sort of the strategy it intends to employ or deploy over a period of time. And then we get to the quantitative bids, which is the risk assessment, which is basically, how do you match the sources and uses of your funds and the ability of that fund to actually repay the recourse liabilities over the period of time, as in, when they become due under what we call a moderate stress scenario. So what we model in these structures is basically the great financial crisis happening again and again again. So that's the first bucket, and that is a little bit different to the mid market clo and the mid market clo usually sort of starts off with defined assets, so you already have the assets within the intended structure that you're planning to run and and we the difference between the mid market clo And the typical BSL clo for example, is that is the only thing that different. It is different is the key inputs. So the way we derive the asset rating, the ratings of the obligor and for mid market Clos, because these are smaller companies, these are usually requested by third parties, so it's usually the manager that requests for us to do the ratings analysis, rather than the issuer, which is typically the case for a public rating. So what we do is we have credit estimates for companies that have below 500 million emissions in terms of debt, and for companies with above 500 million, which are actually happening more and more in the US and in Europe as well, we have what is called the PCA, which is private credit analysis, which comes with a bit more write up, essentially. But the difference is that it's a point in time rating, so you don't have the benefit of the analyst sitting with management, discussing overall strategy, etc, etc. Is just at the point in time test operating, but it's a fairly good indicator of the credit worthiness of the underlying borrower or the obligor. What we do see in Europe, and there's a significant interest of in Europe for the last, I would say, 24 months. But really, there's been two major obstacles that there are sort of posing managers. One is fx risk. So we're not like the US. We don't have single currency, although we like to say we do a lot of the time. The investments are actually made in three basic main currencies, us, GBP, so British Pound and Europe. There's also a big Scandinavian market as well, but for much smaller companies, so sort of getting over that FX risk is key. And why is that key, because it makes the structure very expensive, and it limit, limits the structuring that you would normally see in a typical clo, BSL, clo, so probably it limits you to having two tranches, a senior tranche, a mass tranche, and then there's equity. The other sort of limitation is diversification. So the pool of assets available to be invested in mid market Clos in Europe is arguably smaller than the US. I would argue, over time, we've actually sort of grown as a marketplace for private lending. And I do think there's at least one or two managers to date, that are actually very close to solving both of these problems, and hopefully by end of the year, I cannot say that hopefully by the end of the year, we would actually see at least one European markets here, though, we remain hopeful. You said that last year. I was, I hope, actually 2024, is going to be the year when we definitely are right about that great and
Tom Lemmon, Global Securitisation Editor, GlobalCapital
Neha, can you, can you kind of put all of this into perspective in terms of, like, how, how important private credits become in European finance? Sure. So
Neha Khoda
in general, private credit has emerged as one of the leading sources of financing for left in issuers, and we saw the positives and negatives of that sort of come through in the last five years. But just to put some numbers in perspective, the Aum for European private debt today is about 500 billion, give or take, and it was half that size, less than half that size, pre covid. So we've really taken off in terms of, you know, the need for this kind of financing, and the availability of this financing in Europe as well as us, us is equally staggering. It's about a trillion dollars, and it was just less than 500 billion about five or six years ago. So, and some other things that that the differences that emerged between US and Europe, I'll name a few. First is just the importance of private financing in Europe is a lot higher than in the US. So, and it comes through in in numbers. If you look at the BSL index in Europe, it's about 300 billion. So it's actually smaller than the size of private credit. Aum, we don't have in us, is about equal. I would say BSL is actually a little bit bigger than than private markets. So right off the bat, the capital raise or the capital availability in for leverage financing is higher, is about 40% in Europe, and in us is about 25% so the European market is just a lot more dependent on in those sort of financing. Again, couple of reasons in how these structures have evolved and how this financing has evolved. Firstly, banks are a lot bigger player here than in the US. In the US, banks have basically been ring fenced out of a certain area, and we've been instructed not to play outside the ring fence. And so that's just created tremendous opportunity for private credit. But here, banks are still a big player, and so that sort of limits the opportunity for institutional investment. And then also, we also have retail as a big player in us, which is not so much of a case in Europe. So all these factors combined, we see more influence of private capital Now overall, if you take a step back as to why private private capital in general, has become so big, well, performance is a big leading indicator. So and this has become even more observable over 2022 and 23 where we saw most of the public investments, public markets sort of dip down and private markets outperform. And this especially true for private debt in 2023 private equity actually dipped into negative returns and private credit, along with BSL, was the top of the top. It was like top of the leaderboard in terms of last 12 month performance. So that that's a good leading indicator into, you know, how many, how much inflows you're going to get in the foreseeable future. In Europe, I think private capital has done even better than the US, about one or 2% better on an LTM basis, European private capital has returned close to 14, 15% us private capital about 11, 12% on a look back 12 month basis. And then final thing I'll say is that there's also a need for this financing, not just from the issuer side, which is very clear. Now, you know, as banks step back in, 2022 private capital came in and and rescued many issuers, thereby sort of depressing the default rates, which is agreed from issuer point of view and also investor point of view. But also, we also have to understand that there's a need from the investor side for diversification. And so we are increasingly hearing more pension funds insurance companies make place for permanent allocations in their portfolios to private assets, whether that's private equity or private credit, and then in a higher for longer rate environment, allocations naturally gravitate towards the top of the capital structure. So we are now. We are seeing where, you know, where pension funds and insurance companies are saying, hey, we want to maintain our allocations to private capital, but we just want to move up the stack, less on private equity and more in private debt. So all these factors combined have sort of come together to spur the there's this burst of growth. And
Tom Lemmon, Global Securitisation Editor, GlobalCapital
lastly, in our sort of overview, SURU, your clients are often investors. What do they really look for when it comes to things like data and transparency? And I must touch on some of those ideas, but
Suhrud Dagli
yeah, and I just. I can pick up on what everybody is saying, that it is transparency is big. We we largely play in the consumer space, which, you know, starting from a comment about insurance capital allocation, like lot of those markets, have not been available in the public securitization space for insurance companies, so they are going more and more into the private credit space, even in the consumer, whether it's just plain mortgages to all other consumers, like bridge loans, which are kind of like maybe mortgage ready, mortgage adjacent, all the way into buying out pay later loans, and both in US and Europe. So one of the things there is in the just speaking from the US insurance space, mortgage like loans can be treated as for loans, and they allowed to invest in those without needing a securitization on a rating wrapper. But everything else requires a reading wrapper, so ratings and that level of transparency is pretty big from the investor point of view. I think one of the alphas that investors bring to the private credit space is their ability to understand structures and manage credit and work with the their counterparties. So in focusing on the consumer side, our clients want the transparency of understanding the underlying credit, not only you know at the time of investment, but more importantly, on a regular basis. They want to get you know daily weekly updates on what's happening, so they can work very closely with their counterparties to resolve any issues and manage any credit downturns. And that is also working well in the European markets where you don't, like, you know, like what the US did around the global financial crisis is to use the foreclosure as the as the mode of resolving some of the credit issues which which didn't work well at all, but the loan modifications and doing that more proactively also works very well with having that data transparency and and then the other big advantage of private credit structure is that we can also manage the counterparty risk and Counterparty exporters. You also know, like, Okay, what's ISD? What's the health of the lender, what's the health of the servicer, who's managing the transaction? The good news is that technology has come a long way. Data sharing on the cloud. It can be done instantaneously. You can very well manage privacy issues, but that's one big issue in the consumer space, is that you lenders obviously don't want to share the borrower level information, but they can still share shared performance almost in real time through cloud based sharing options. Being a technology firm, I can't not mention AI. AI does make the data mapping much easier, so that, like, you know, investors can manage large commitments in a more efficient way. So there's definitely in the consumer space, it's like, you don't always get it, but it's like all our investors do need that transparency,
Tom Lemmon, Global Securitisation Editor, GlobalCapital
right? So thank you. Thank you all for that little overview. Just wanted
Marta Stojanova
to add, and that transparency sort of is also related on the valuation side of things as well. So getting a third party confirmation of what your assumptions are in terms of the stress tests and the underlying asset valuation is also helpful. And again, the other aspect is the benchmarking. And now I know a lot of these nav financings and subscription lines, and also you know the first mid markets yellow in Europe will likely be private, not publicly available, but it sort of helps the managers or funds or the LPs to basically assess not just the underlying fundamental risk of the credit or the exposure that they're managing, but also to, you know, allow them benchmarking between sort of the different pools of capital. And to DIA's point, it helps with allocation and allocation decisions and obviously the growth of the marketplace. So transparency, both in terms of underlying and data overall aggregation, would actually be a key driver for further growth of this marketplace. Yeah.
Tom Lemmon, Global Securitisation Editor, GlobalCapital
So we're going to try and move on to the sort of looking at the macro side a little bit now, so obviously we mentioned hire for longer, and I feel like everyone's in that agreement. Now, maybe if we start with Jason, sort of, how will the sector manage higher for longer? This sort going forward?
Jason Brown
Sure, I think on. Private credit side for a fund, you know, like ours. We, you know, we raise capital. The capital has a hurdle return, where the managers get money, and has a hurdle return that the investors get money. And, you know, depending on the makeup of the asset and depending on the makeup of the investor, this higher for longer. Kind of period that I think we all think that we're in is actually very beneficial for us. We we can compete very much directly with, with a bank mezzanine solution, which is, which is pretty common in private debt, you know, you'll often see, you know, a bank in some structures, and, you know, certainly in the US, and obviously over here in the same mezzanine provider, and so a Unitron provider like us can be incredibly competitive, competitive in this higher rate environment. Because, you know, we probably have a, you know, a mid single digit kind of minimum hurdle and a higher single, low, double digit return requirements. So with rates being higher, you know, we're able to be very, very competitive. And last year actually was, I think, our largest deployment slash New Deal year in our 17 year history. So you know. So the environment for us right now is very good globally. Some markets much, much better we do. We do a lot in Latin America, and that's incredibly good market for us right now. But, but with the deals we're seeing in Europe and competing against, you know, on in Europe because of our fund structures, which I think are very similar to a lot of other fund structures, the way the hurdles work. You know, private credit funds can, can compete, you know, incredibly well. So, you know, I selfishly hope this, this can continue for a little while, because, you know, deal activity continues to be very robust.
Tom Lemmon, Global Securitisation Editor, GlobalCapital
They have Boris. Anyone want to add? Yeah,
Marta Stojanova
I think the competitive tension between BSL and private credit lending has been here, and it actually for a while. It isn't just about, you know, providing a liquidity gap when liquidity is needed. I think private credit is here to stay, and it's actually a good thing for everyone, because a competition is always good, because it leads to innovation, creativity, and it also sort of leads to growth, because credits that arguably were limited to in Europe, you know, typical bank, financing, etc, etc, and could and had to cap their growth ambitions, could actually sort of reach out to somebody that thinks a little bit outside a certain border, or Certain borders. So it's actually a good thing. But again, sort of with great power comes great responsibility, as Peter Parker was and and I do think you know that need for transparency and sort of breaking down of that that barrier would actually sort of be be essential to further unlocking that for the growth potential that is inherent in the marketplace,
Tom Lemmon, Global Securitisation Editor, GlobalCapital
should go with Boris and then, I
Boris Redfern
mean, from our perspective, we've seen a lot of competitors in the revenue based financing space take advantage of that low rate environment that we saw with some look back on misty eyed a few years ago, And that has actually driven quite a lot of issues for those businesses, perhaps because they haven't put enough focus on risk management or underwriting of who they're lending to. The objective was, in a nutshell, raise as much cheap debt as you possibly can and get it out the door right, and then and then the it sort of comes home to roost when you're whipsawed by interest rates, and you've got a variable rate on that line of credit, and suddenly low performing or non performing risk that you have in your portfolio becomes a real burden and a problem, because we appear to peer, because we approach it in an off balance sheet way, we just facilitate the transaction. We have had to focus entirely on the risk management side, rather than necessarily approaching it from a from just trying to disperse as much as possible. And so now that we're approaching we're setting up a special purpose vehicle, and we're approaching that stage where we're able to lend to rather price unconscious end clients. So we're not really exposed by a higher interest rate with everybody's going to make plenty of money regardless. But we're also protected more by having a much more robust underwriting and risk management system that takes place before we're comfortable lending.
Tom Lemmon, Global Securitisation Editor, GlobalCapital
Yeah, and there, what sort of challenges do you see?
Neha Khoda
Yeah, so I was going to say, just from a research point of view, it's important to acknowledge, sort of both sides of the coin. To me, higher interest rates, they're a double edged sword. So on the one hand, it's great for investors, because there's this increasing need for yield and and the ability to make higher. Turns because of higher base rates, and we can see why there is this inflow of capital into float floating rate funds and Clos and any floating rate product which is attracting a tremendous amount of demand. But on the other side of the ledger, you also have issuers that are unable to meet that interest cost, and we've seen that persistently in declining coverage ratios. We had flagged this risk about 18 months ago, when we first saw sticky inflation higher for longer, and we were been saying that we have to keep an eye on that bottom 10, five to 10% of issuers that will not be able to meet the higher outgoings, and we will need some sort of additional help from investors. And so we've seen that consistently play out, and that leads me directly into the challenges of higher phenomenon. Advantages are there high returns for investors, but challenges, critically, we've seen some pockets of leverage finance where coverage has fallen below one one times, which essentially means that borrowers cannot, are not able to pay their basic interest outgoings, and that's a concentrated Triple C part of the market. There are some B threes that are on the way to triple C's. We've had a huge downgrade wave in USL us BSL loans, not so much in Europe, but that could come in a higher for longer. We also have our eyes on non sponsored loans, because essentially, when push comes to shove, they have very little ability to raise liquidity on when their backs against the wall. And then also some high levered pockets within lefn, there are some near trenches, which has been a great product. It fits a niche, but at the same time, these are 1l 2l combined, highly levered. And there have been some questionable deals made in essentially the year 2021, which was, which is the peak of the cycle. So you kind of have to balance that and the higher for longer, it's a great divider between the winners and the losers. The winners will be the issuers that can pay those higher interest costs, and thereby will attract a lot of capital inflow, and then the losers will be those that succumb and are not able to function in a higher, prolonged environment. Yeah,
Boris Redfern
one thing
Suhrud Dagli
to add. So just a couple of things, I think that's, that's, that's really true. And I think to Boris's point, it's like throwing up as in risk management in newer deals. And you know, we are not the same opinion as Jason. We like this because that's where, like, higher rates does lead to more private credit investments. And now we've seen wealth also high net worth, and wealth managers also coming into the space. So more asset managers are allocating capital to private credit, but yeah, risk and how the structures work are definitely more in focus now. Yeah.
Tom Lemmon, Global Securitisation Editor, GlobalCapital
And then moving on slightly, Paddy, you touched on some of the regulations. But are there any in particular that are coming down the track that are going to have a big impact on the sector?
Paddy Rath
Well, I suppose, post great financial crisis in Europe, we've kind of, we're living in an environment of kind of constant regulatory evolution. It's interesting. Actually, I dropped into a panel yesterday on kind of Basel 3.1 which is coming down the tracks, and you know, the potential for that to create opportunities for non bank lenders to maybe, you know, fill gaps where banks may be pulling back from, from from certain areas. But the real takeaway for me from that panel was actually that, you know, these regulatory developments create a new opportunity set for kind of like, you know, non bank lenders, and then potentially banks provide finance and non bank lenders. And it's just an interesting kind of segue, possibly, I digress. So looking at, looking at, kind of some of the legislative developments that will impact structures that we work on, or that we advise on, two kind of kind of pieces of fund legislation that are of kind of kind of great interest in my funds, colleagues are kind of aifmd too, which, for the first time, will introduce a kind of harmonized loan origination framework for a alternative investment funds across Europe. Prior to that, there was not one in Ireland. We did have a kind of a loan origination regime that applied to our loan origination AIFS. And so I think my colleagues in our fund Siemer, kind of have been kind of working in that within that framework for some time, and they expect an uptick in kind of loan origination, quaifs, you know, as a result of that. Then also there's kind of ltiv 2.0 and so there was kind of an original LTF, which is the European long term investment fund framework in Europe that was updated and revamped in January of 2024 and there are kind of two really interesting pieces to that legislation, which are kind of one the kind of coming together of kind of liquid and liquid classes, but also kind of the potential for the ltiv to be used and to be marketed to retail and professional investors. And so there has been kind of a lot of chatter around the retailization of private credit, and I think it remains to be seen whether the LTI wrapper will be used to kind of raise and deploy that capital at scale. I don't know, Jason, if you have any kind of thoughts around kind
Jason Brown
of you. Yeah, I mean, I think a member, I'll step back for a second. I think that, you know, if I go back 15 years ago, any of these kinds of discussions you had with anyone, or you're walking to investor, three quarters of the time, they look at you and like, What are you talking about? Prior credit. This is just ridiculous. Fast forward, and I think eight or nine years ago, we did a publicly listed trust in the UK that we still have. We have a retail fund in Canada where I go and sit in front of a bunch of investment advisors and try and explain what private credit is to which is an interesting discussion, you know. And now we're on our second rated Fund, which is mostly insurance company money at this point, and we've gone from raising these, these small funds as a small manager that are in the hundreds of 1000s, to now we're on our second two and a half billion dollar fund. So it's all this in evolution. I think all these products, I think are just going to give more managers like us, the little tiny ones, not say, Apollo and Aries, obviously not the gigantic ones that no one's ever going to get. No one's ever going to lose their job for giving them money. They'll lose their job for giving me money. It's just going to give a lot more managers opportunities to raise capital and go and find deals and help expand the universe by getting it out. And I certainly think that some of these new structures are going to be hopefully interesting to us as we continue to grow and scale and hopefully have a reputation that can allow us to do some of these things
Tom Lemmon, Global Securitisation Editor, GlobalCapital
right. So I'm just a little bit worried about time, because, as you can see, there's questions popping up, and I would like to give us a little bit of time on those. One of the things we were scheduled to talk about was like, ESG and data. ESG, it feels like it's dropped off the radar since rates went up. Really, to some degree, is it still important to to you guys, to investors, and maybe secondly, how can private credit develop go to ensure that it remains important? I don't know who would like to start. Start that one. You can raise your hand if you like. I can address
Marta Stojanova
that, or start to address that. So ESG is very much at the forefront, but it's sort of embedded in investment decision, because I think there were several efforts being made about scoring, etc, etc, and there's various sort of pros and cons in doing that. Standardization is one of the pros, but one of the cons is everybody considers E, S and G slightly differently, and from a different perspective, does it impact the credit? Is that an ESG score, or does it impact the environment? Is that an ESG score, for example? So there's sort of various different approaches. What we have seen at the moment is a proliferation of third party evaluations where, sort of you help managers and also investors to assess that risk, not only from the point of view of credit risk, but also, like I said, the impact on the environment, the social and the governance issues as well that are relevant. I'll pause there, because this is sort of a, this is a totally different panel by itself. Yeah, we had a lot to go. Continue to do so, to be so well
Tom Lemmon, Global Securitisation Editor, GlobalCapital
maybe, maybe, in the sense of, you know, trying to answer some of these questions. We were going to talk a little bit about lack of transparency with surah. Maybe take take you on this first but that first question says, How do you expect regulators to react to the rise of credit, given the inherent lack of transparency? What do you think is most likely to come Yeah,
Suhrud Dagli
I mean, I can, I can talk about that even in the kind of the context of ESG as well. You know, the one thing that in the consumer space, what private credit has done is that, and ends a lot in Latin America, is that it does provide fun credit for underserved, right, unserved borrowers, which is, which is great, and there is, there are some funds who have taken advantage leverage that in the s space for ESV, For sure, but that also comes with lot of regulatory scrutiny. So this is like both the Consumer Finance Protection Bureau, CFPB in the US is working closely with the EU commission on that consumer aspect of private credit, because that transparency is lacking, and they specifically focused on buy now, pay later loans, because those are becoming very big, and both will all, all markets, really so, so there is, there is, I think that is scrutiny around that transparency, and there is new regulation coming on that specific on, like having the CFPB guidance and EU Commission guidance. On, on how borrowers are served, how loans are modified, and credit is monitored at that level. And I'll
Neha Khoda
just quickly add because I think it's important. Now we've obviously seen increasing regulatory scrutiny, both in the both sides of the pond, US and Europe. And not not a single day goes by without a negative headline about private credit. Some of them are misplaced, but, you know, some of them are rightfully asking about transparency. And I think you know, to Patty's point, the realization of private credit is ultimately, in my opinion, a step in the wrong direction if you're trying to prevent regulatory scrutiny. So, so you know, the more we tap retail funds for private credit, the more in focus we become, you know, in the eyes of the regulators, and the more questions there right will ultimately arrive.
Marta Stojanova
I think it's important because, I mean these these funds, private or not, it's they're still exposed to the same fundamental risks as every other market. Is important because of macro and micro as well. So the underlying asset, so it's it, and being such a large component of the financial system, it does sort of expose question marks about, how do you, how do you sort of monitor potentials for systemic risk, and if you have a big part of the equation remaining hidden or unknown, it does expose the overall system, governance and also central banks, to sort of potentially more volatility inherent in the system than they actually are currently modeling modeling as it
Jason Brown
were. Yeah, I look at transparency in two ways. One is towards, you know, on the investor side, one is towards retail investors, and one is towards institutional investors. I can absolutely say that any large private credit fund, an institutional investor sees everything they see, every investment memo, they see, every document we get, they see absolutely everything on the retail side. You know, things are more sense, you know, synthesized down, but the access to the manager is, is there. So as I kind of said earlier, you know, I would go and sit in front of just regular investors plus their money manager, and talk about our deals in great depth. So I actually think, you know, transparency is super important for, you know, allowing people to understand the asset class, get comfortable with a manager and what they're trying to do and why what they do differentiates themselves to a competitor, or differentiate themselves to a bank or or, you know, whatever the other competing environment is, and I think, you know, funds that are not transparent and don't give these the kind of information that an investor really needs to understand to, you know, really, really want to get involved more heavily in private credit is missing out. And so, you know, I'm hopeful that, you know, people are just going to do that naturally, irrespective of what happens from a regulatory standpoint, because, one, it's the right thing to do, and two, it's really how, you know, funds gonna be able to get more, you know, capital and in the door to invest. It's, you know, there's two very simple reasons for me,
Tom Lemmon, Global Securitisation Editor, GlobalCapital
I guess alongside that sort of transparency question, there's the other very popular question is, how do the banks sit in all of this? Some are collaborating, rather famously, in some cases, some doing well, some doing, appearing to do not so well. Surely they're long term. They're going to be more involved. Maybe. Neha, should we start with you? And Boris
Neha Khoda
Sure. Look, I think the rise of private credit is very structural in nature. We've been saying that for for a long time now, granted, there'll be cycles in that structural trend upwards, but, but this is a pool of capital that's essential for the our credit ecosystem and so and I think most parties have recognized that, and I think most are here to play nice, and most are here to collaborate. And so we seeing the need for bank capital in some middle market deals as well. I mean, there's need for the revolver. There's some, you know, higher attachment points that banks just naturally lend themselves well to. So I don't, I don't see the need of banks going away. And also, I think we have to recognize that these two markets, that the institutional and the private market issuers, are increasingly straddling these markets. It's become increasingly easy for issuers to go back and forth, especially the upper middle market, and we've seen that tremendously in the US, where for the first time, we saw deals actually getting repriced or refinanced out of private credit to institutional space, because the sponsors are getting 100 200 300 basis points coupon cuts in institutional markets. Because, you know, the because equity markets were rallying and and on the flip side, we saw the opposite in 2022 and three, where deals were going to private credit. Because. Because the bank balance sheets were not open, they were not open for business. So I think this is an important thing to remember. And I think even from the investor point of view, the capital that is coming in ultimately, to, you know, lend to institutional BSL deals. Ultimately, the same pool of capital is also being routed through private platforms to middle market. So this is, it's an increasingly collaborative activity. I would say, Yeah,
Tom Lemmon, Global Securitisation Editor, GlobalCapital
Boris.
Boris Redfern
I mean, I think from from our perspective, lending into SME, SMB space banks are under enormous amounts of pressure from governments as well to get involved and to step in. There is an 60 plus percent of the economy is actually built on, at least in the UK, is built on businesses that have less than 1520 employees. So it is incredibly difficult for banks to continue to underserve such a large segment of the economy. They're under pressure, not only from governments, but also it just doesn't make economic sense to allow that much potential business to walk past the shop front window. So I think they will continue to have a role. I think that role will expand, but I think there's also a friction reducing role which private credit has in bridging the gap between Okay, banks don't necessarily want to get involved in the granular work required to price all of these very, very small loans. So how do we as private credit professionals and managers, in you guys' case, wrap that in a way that can be consumed by banks without sticking in the throat quite so much.
Tom Lemmon, Global Securitisation Editor, GlobalCapital
Okay, well, I can see the timer is ticking very rapidly on us. Thank you all for your for your insights today, and thank you all for listening. Hope you enjoyed it. And next up, Joel Holsinger from Aries is going to talk to me for about half an hour. And and, yeah, thank you.
Boris Redfern
Thank you.