John Popp Andrew Strommen Tiffany Gherlone Baxter Wasson Viktor Kozel
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Key takeaways:

  • Disintermediation of lending: Recent events and stress in the banking sector have accelerated the shift of lending from banks to private players, with institutional investor stepping in to fill the void.
  • Growth of private debt: Private debt, particularly to companies backed by private equity, is rapidly expanding and forecasted to reach USD 2 trillion by 2027, competing with traditional funding routes.
  • Regulatory implications: Tighter regulations on banks may further drive the growth of private debt markets, with regulators preferring institutional investors as lenders.
  • Opportunities in commercial real estate: Reduced lending by regional banks presents opportunities for private debt providers to enter the commercial real estate sector, albeit with challenges such as covering financial costs.
  • Challenges and caution: The rapid growth of the private debt market brings challenges like unorthodox underwriting techniques and increased leverage, emphasizing the importance of disciplined underwriting and seniority in the capital structure.
  • Regional nuance: While the US leads in the private debt market, Europe and Asia also show promise, albeit with regional differences in banking focus and regulatory frameworks.

In the realm of alternative assets, private debt has emerged as shining star, experiencing a rapid evolution and now basking in what many are calling a golden moment. Amid rising interest rates, private debt has remained remarkably resilient, delivering robust returns, and attracting fervent investor interest. However, some questions are emerging about how resilient private debt will be in future as well as where the best opportunities now lie, particularly as syndicated loan and high-yield bond markets rally.

To help sort the fact from the fiction we sought views from John Popp - Global Head and CIO of the Credit Investments Group at Credit Suisse Asset Management, Andrew Strommen - Senior Investment Analyst in Active Equities, Tiffany Gherlone - Head of Real Estate Research, US, Baxter Wasson - Co-Head of O’Connor Capital Solutions, and Viktor Kozel - Head of Infrastructure Debt, Real Estate & Private Markets at UBS Asset Management.

Sometimes, what looks like a loss can turn out to be a gain in disguise. And so it was in the dark days of the financial crisis, when many of the world’s most powerful lending banks were forced to the sidelines of the loan markets to nurse ballooning credit losses and repair their battered balance sheets. It prompted legitimate concerns that funding lines to cash-strapped corporations would run dry and exacerbate the prevailing economic turmoil.

But instead, the hole that banks had left was gradually filled by institutional investors, which began to provide capital directly to the smaller and mid-sized companies that needed it, often on terms that were seen as favorable on both sides of the deal. The wheels of commerce continued to spin.

Andy Strommen says that tighter rules governing asset liquidity and capital ratios would likely depress banks’ return on equity (ROE), in the case of the mid-cap lenders by 2% to 3%, or 4% to 5% in the event of a recession. Forcing them to hold more liquid, but lower-yielding assets would also encourage them to pursue fee-based revenue sources in areas such as wealth management and investment banking rather than employ their balance sheets as lenders.

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