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5 Global Private Credit investment opportunities


Executive Summary

An analysis of recent developments in the private credit market reveals several compelling investment opportunities for investors to capitalize on in 2024 and beyond:

1. Financing asset-based lending (ABL) portfolios being divested by banks

2. Providing capital to private credit funds looking to acquire syndicated bank loans

3. Investing in private credit secondaries funds to gain exposure to loan portfolios at a discount

4. Allocating to semi-liquid private credit funds offering attractive yields to retail investors

5. Benefiting from spread tightening and increased competition among direct lenders for high-quality deals


With banks pulling back from certain types of lending and divesting loan portfolios, private credit managers are stepping in to fill the void. Simultaneously, a nascent secondaries market is enabling investors to access private credit exposure at discounted valuations. As more capital flows into the space, the largest managers are delivering strong returns, especially compared to private equity. Overall, current market dynamics are creating a highly attractive environment for private credit.

Opportunity 1: Financing ABL Portfolios Divested by Banks


As banks face increased regulatory pressure and capital requirements, many are divesting non-core asset-based lending (ABL) portfolios. Private credit managers are eagerly acquiring these loan books, as evidenced by Ares Management's recent acquisition of a $400 million ABL business from City National Bank of Florida. KKR has also been active, acquiring a $7.2 billion portfolio of RV loans from BMO and a $373 million pool of prime auto loans from Synovus Bank.

Banks' retreat from ABL is expanding the investable universe for private credit. The $5 trillion ABL market is estimated to be several times larger than the $1.5 trillion direct lending market. Investors can gain exposure by providing capital to managers making these portfolio acquisitions. Look for managers with prior experience in ABL that are nimble enough to execute on complex portfolio purchases.


Opportunity 2: Acquiring Syndicated Bank Loans

Not only are banks selling loan portfolios outright, but they are also syndicating single loans that no longer fit their risk or return parameters. Private credit funds are increasingly clubbing together to acquire these syndicated loans. A prominent example is the €4.5 billion unitranche financing for the buyout of Adevinta, one of the largest private credit deals on record.

With banks looking to sell more single loans to comply with regulations, investors should look to partner with larger, well-established private credit managers who can write sizable checks and lead or participate in loan acquisitions. Managers with strong bank relationships will see more deal flow. Private credit funds acquiring loans in the secondary market can potentially benefit from discounted pricing.


Opportunity 3: Investing in Private Credit Secondaries

The underdeveloped private credit secondaries market is poised for rapid growth in the coming years. From $17 billion in 2022, secondary deal volume is forecast to reach $50 billion by 2026 according to Coller Capital. General partners are tapping the secondaries market for liquidity when M&A exits are scarce. Limited partners are also utilizing secondaries to rebalance portfolios and cash out of funds.


On average, private credit stakes are trading at a 10% discount to net asset value in the secondary market, an attractive point for buyers. Secondaries enable underwriting a seasoned loan portfolio with visibility into its performance, as opposed to a primary deal. Several established managers have launched dedicated private credit secondaries funds. Investors should consider allocating to these vehicles to exploit market inefficiencies and acquire private credit assets at a discount.


Opportunity 4: Allocating to Semi-Liquid Funds for Retail Investors

More private credit managers are launching semi-liquid funds to meet demand from retail investors seeking higher yields. These vehicles offer periodic liquidity, typically quarterly or semi-annually, through a hybrid structure. Compared to traditional closed-end funds, this increases accessibility for individual investors.


Semi-liquid funds are especially suited for income-oriented strategies like direct lending, asset-based finance and real estate credit. Notable recent fund launches include offerings from Goldman Sachs, Blackstone and Carlyle. Allocating to semi-liquid funds provides investors a way to boost income in a rising rate environment while maintaining some liquidity. Semi-liquid funds are an attractive option for private wealth channels and have potential to significantly expand the capital base of private credit managers.


Opportunity 5: Benefiting from Increased Competition for Quality Deals

Competition is heating up among direct lenders, especially for high quality, recurring revenue deals in software, tech and business services. Spreads have compressed 50 to 100 basis points in the upper middle market in recent months. Lenders are also willing to stretch on leverage, underwriting unitranche deals at 6.5-7.5x debt to EBITDA for premium credits.

While rising competition is a headwind, it presents opportunities for investors to back managers who can still generate robust risk-adjusted returns by maintaining discipline. Managers differentiate themselves through strong origination, sector expertise and ability to lead or anchor deals. With capital chasing fewer quality deals, partnering with a trusted, long-tenured manager is critical. If M&A activity picks up, the supply/demand imbalance could ease.


Conclusion

The private credit market is benefiting from powerful secular tailwinds, as a combination of factors drive increasing investor allocations to the asset class. With banks in retreat, private lenders are capturing additional market share across a widening range of lending segments. A burgeoning secondaries market is stimulating further growth and liquidity.

Leading private credit managers are generating premium returns and expanding their strategies to meet rising investor demand. Competition is elevated but remains rational, with lenders stretching most for top tier deals. By selecting proven managers and gaining exposure through a diverse mix of investment types (ABL portfolios, secondary loan purchases, semi-liquid funds, secondaries), investors are well-positioned to capitalize on the continued growth of private credit.

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