Although private debt funds existed in the US as early as the mid-1980s, the birth of the Private Debt market in its current configuration can be traced back to the early 2000s mainly following the consolidation in the US banking system for reasons of "natural evolution" of the market. The reduction in the credit capacity caused by consolidation in banking industry sector led to a partial reallocation of investments in institutional portfolios towards credit instruments, thus giving rise to the Private Debt asset class in its modern sense.
It is with 2008 that the market sees the beginning of a strong growth trend. The financial crisis and the consequent "induced" consolidation, led to a drastic reduction in the credit capacity of the banking system at a global level which mainly affected the so-called Mid Market segment (the SMEs).
The regulatory measures adopted with the Basel III Agreement and the IV Directive on new Capital Requirements imposed on banks create a further downside effect on the banks’ ability to provide credit.
This capacity vacuum pushes a growing number of institutional investors to allocate an ever higher percentage of their assets under management to the
Private Debt asset class, also attracted by the low volatility of the instrument,the "downside protection" that it offers, the low correlation index with other asset classes, higher absolute and risk adjusted returns than other asset classes such as equities.
In 2019, 168 Private Debt funds completed their fundraising for an aggregate total of US $ 147 billion (source: Private Debt Investor - 1/9/2020).
The fall in the volume of funds raised in the first quarter of 2020 (Private Equity funds recorded a -27% compared to the first quarter of 2019, Private Debt funds a -41%) as a natural consequence of the global coronavirus pandemic could hide what is instead the strong interest in the alternative asset class, particularly Private Debt, which recorded at the beginning of April 2020 the absolute record number of 457 funds in market with an aggregate funding target of US $ 201 billion (source: Preqin).
These statistical data offer a numerical proof of the strong development potential of this asset class not only in the more advanced markets such as the USA or the UK but also in the European Continent, a market that has historically followed the evolutionary trends recorded in the USA and the UK.
The development of the Alternative Credit Market
The Private Debt market has developed in the USA over the past twenty years. The European market developed more recently but is growing and transforming fast.
Credit to the Mid Market sector (SMEs, leveraged buyouts etc.) dominated by commercial banks
Alternative lenders play a marginal role in credit markets
Instututional money invested primarily in large market mezzanine funds and CLO’s
“Natural”, size and scale driven Industry Consolidation: large institutions acquire the smaller banks
Aggregate bank credit capacity reduces
Reduced credit capacity of the Mid Market credit platforms
Growth of non bank and institutional credit platforms
2008 - 2012
Bankruptcies, nationalisation, mergers of banks
International banks re-focus their portfolios on domestic markets
Number of active banks in the market plummets
Individual banks’ credit capacity reduces considerably
“Forced” Industry Consolidation driven by banks’ bankruptcies: large institutions acquire the smaller banks
Credit capacity of the banking industry reduces considerably
Regulators impose higher capital ratios and operating standards to banks and require banks to adopt more stringent credit standards
Banks re-focus their model on business involving lower credit risk
Growth and wider acceptance of alternative lenders by borrowers
Banking Regulations And growth of the Direct Lenders
Credit limits approved by banks decrease
Regulators impose new and stringent regulations pushing many banks out of the market
Alternative lenders increase their market share in the credit markets
The number of alternative credit funds increases almost exponentially
Increase demand for credit which the banking industry is unable to meet
Growth of demand for investment in alternative instruments from institutional and private investors
Demand for investments offering higher yields than traditional instruments