What is the Private Credit Market?
The asset class of private debt capital, also known as Private Debt, gained momentum after the 2008 global financial crisis. In its aftermath, banks and other traditional lenders re-evaluated their risk assessments and reduced their lending, particularly to small and medium-sized enterprises (SMEs), creating a market gap. Alternative lenders, such as asset managers from the private markets, have filled this gap to meet the financing needs of these companies, which are enormously important for economies.
This disruption led to a surge of innovation, resulting in today’s private credit marketplace featuring many providers and covering a wide range of loan types. These range from peer-to-peer loans to private credit funds that specialize in a whole variety of strategies. Even hedge funds are partially involved. The diversity of strategies under this umbrella offers those who choose to invest in private debt access to different risk/return options and good diversification opportunities.
In essence, a win-win situation has emerged, as the expansion of competition has also led to offerings that are better tailored to the borrowing companies’ needs than is often the case with traditional lenders.
Private Debt and SMEs
With the development of the market, the incentive for SMEs to take out private loans has also changed. It is no longer primarily the lack of access to bank loans that drives them – instead, many SMEs are attracted by the greater flexibility that the private credit market offers.
Most loans are structured so that interest is paid in a single lump sum at the end of the term, rather than with regular repayments as is usual with bank loans. This, in turn, provides more room for growth, as the company is not burdened with ongoing principal and/or interest payments.
Loans that allow for payment suspensions under certain conditions without penalties or that impose fewer strict covenants on the company can also be attractive for borrowers. This reduces the pressure to constantly prove that they are meeting stringent requirements. This flexibility proved particularly valuable during the global COVID-19 pandemic.
For many SMEs, the higher interest rates associated with private loan agreements are worth it to gain this flexibility and ensure that the loans are tailored exactly to their individual needs. Instead of focusing solely on debt repayment and worrying about meeting covenants, they can concentrate on managing and growing their business and ultimately creating value.
A Huge Growth Market Opens for Private Investors
Since its inception, the Private Debt market has gained momentum as a trusted and attractive asset class for both borrowers and investors. In just over a decade, it has grown from a niche market to the mainstream, now managing $1.2 trillion in assets globally – a figure that is expected to double by 2026, according to Preqin.
For Germany in particular, with its relatively large number of SMEs compared to other markets, this alternative asset class represents an important source of financing for the success of the economy and thus the country as a whole. And with ELTIF 2.0, Private Debt is now opening up to more providers and products, making it increasingly accessible to private investors.