From theory to reality – the next crisis is here

Private debt professionals have frequently shared the view that the good times couldn’t last forever. Amid the global spread of coronavirus, they are set to be challenged as never before.

It’s not quite true to say that the private debt asset class grew up after the global financial crisis of 2007/08. But it was certainly the launch point for direct lending to become private debt’s most prominent strategy as the banks pulled back and left a space for alternative lenders to provide financing solutions for small and mid-sized companies.

Since then, there has been no major headwind to provide a serious test of the credibility and resilience of the asset class. Very few were complacent about this, however. Whenever the point was raised with fund managers, investors and others about the many years of benign conditions, the response was invariably that something will come along to force a downturn any time now – who knows what precise form it will take, but be sure it’s on its way.

The coronavirus outbreak is a reminder that the fundamental rules of the game never change. Suddenly it all feels very GFC-like and private debt is facing what advisory professional James Newsome has described as its “first big test”.

Focus will inevitably fall on deal structures and the extent to which lenders have been forced to subscribe to less-than-favourable terms and conditions in a market where sponsors – often private equity firms – have been able to weight documentation strongly in their favour. How many over-leveraged companies are there in portfolios, now teetering on the brink? In some sectors – energy, airlines, various types of service industry – the pain is already obvious.

There again, we may not find out about troubles within private debt portfolios anytime soon thanks to the increasing prevalence of covenant-lite loans. Private equity firms will argue that the flexibility they have given themselves to work through short-term difficulties without being hauled back to the negotiating table by lenders is clearly a justified and desirable thing – especially if this downturn proves to be of the “sharp but short” variety. Lenders, however, may be left to rue their loss of control in suddenly volatile times.

But in any period when the pieces of the puzzle are thrown in the air, opportunities as well as threats emerge. In some developed markets, there is a view that direct lending has become saturated. In others, it is still a fledgling activity that may get a kick-start as banks do what they normally do in a crisis and retrench. In parts of Asia, for example, lending gaps have clearly emerged, and SMEs are crying out for fresh sources of capital.

In the coming days and weeks, we will continue to reach into the market to gain as many insights as we can into an asset class facing its first big challenge. If you have thoughts you’d like to share with us, please get in touch at

The PDI Global Investor 30 is now open for submissions

Private Debt Investor’s Global Investor 30 is an annual ranking of the world’s leading institutional investors in private debt. The ranking is based on the amount allocated to private debt as of 31 December 2019.

We are seeking your help to ensure the ranking is as accurate as possible. To be considered for the ranking please email Muhammad Obaid, Research Associate:

Deadline for submissions: 15 March 2020