AIMA champions the growth of private debt funds

A new report from the Alternative Investment Manager Association highlighted the growth of private debt funds, saying that they match liquidity better than banks and have a good handle on risk.  

Private debt funds are playing an increasingly important role in corporate financing in the US and Europe, a new report from the Alternative Investment Manager Association stated, saying that the funds’ lending operations are structured better and less risky than banks. In the new report, titled “Financing the economy: the role of alternative asset managers in the non-bank lending environment,” AIMA reported that private debt funds raised about $64 billion last year, with the assets under management in private debt estimated to be around $440 billion now.

While most of the private debt fund growth and activity has been in the US, Europe is also moving towards more non-bank lending and AIMA highlighted certain aspects of private debt fund structures that make them, in some ways, less risky than banks. “Unlike bank depositors, investors cannot instantly withdraw their capital. Most funds are structured as closed-end private equity style funds. Given their long-dated liability profile, they are therefore less likely to generate financial stability concerns,” said the report. At the fund level, the majority of private debt funds don’t use much leverage, AIMA wrote. “The majority of private debt funds do not use any leverage. The funds that do, use modest amounts (1-1.5 x net asset value). Managers are also using diverse and sophisticated methods to manage and monitor risk in their private debt portfolios from origination to liquidation of investments,” the research said.

According to AIMA’s research, 67 percent of private debt funds are closed-end funds, while the 33 percent that are open-end have measures in place to prevent liquidity mismatches. All of them use suspension of redemptions, 73 percent use gates, 87 percent have notice periods and 56 percent have a minimum investment period.

These alternative lenders have been most active in financing small and mid-size businesses, as well as important real estate and infrastructure projects around the world, AIMA said. “Some of the world’s largest institutional investors are helping to bridge the financing gap for the SME sector by investing in alternative credit funds or taking a more direct approach and doing it for themselves. Non-bank lenders enjoy a growing credit portfolio across a wide range of businesses as well as provide support to a broad variety of infrastructure and real estate projects,” the AIMA report said.

The paper repeated the long-held view that a large part of what’s driving this growth is banks’ increased retrenchment from lending, but also highlighted the fact that mid-market corporates are becoming more interested in different sources of capital. “It is not only the supply-side dislocation driving growth but also the demand from mid-market corporates to diversify their sources of funding. Non-bank lenders often provide highly valued flexibility of financing terms and are able to make fast investment decisions. Further, investors have also been attracted to the strategy as a means of increasing yield from their fixed-income allocations,” the AIMA report said.

“Arguably, the role of non-bank finance has never been more important than today,” AIMA concluded. The London-headquartered organization created its Alternative Credit Council in late 2014 to provide research and education on the developments and trends in the alternative credit market.