Private credit fuelling global economic growth: ACC, Dechert

A new report from ACC and Dechert paints a bright future and global role for private credit. 

As private credit has matured into an alternative to traditional finance for businesses around the world, the asset class is significantly boosting employment and economic expansion, according to a report released Tuesday by Dechert and the Alternative Credit Council.

Private credit lending ballooned to over $600 billion by the end of 2016, marking a 14-fold increase in size since 2000 and a compound annual growth rate of 20 percent over that time, according to data collected by ACC and Preqin. The report projects that the space will reach a $1 trillion mark by 2020.

That prediction aligns with the fast pace of growth that the asset class saw the first three quarters of this year, as global private debt strategies raised nearly $119.5 billion as of 30 September, PDI data showed. Fundraising this year is on-track to surpass the previous annual fundraising record of $130.1 billion in 2013.

With new war chests of capital, private debt funds have sharpened their focus on a major engine of economic growth: smaller businesses. Smaller businesses represented the largest category of borrowers for the asset class in 2016, receiving 40 percent of lending by private credit firms, compared to 18.4 percent to large corporate firms, the report showed.

Small-to-medium sized enterprises accounted for more than half of all formal jobs as of last June, according to the World Bank.

ACC and Dechert found that SMEs are increasingly attracted to private debt managers’ flexibility and faster deal execution compared to other financings like private equity deals.

“Many borrowers, especially among SMEs, are wary of diluting their equity stake in their businesses and find the flexible approach of private credit more attractive,” the report stated.

But this explosive borrower demand and fundraising in the asset has not lead private credit managers to shirk off due diligence on credit risk. Though managers have shown an increasing flexibility on loan covenants, they have not relinquished “their focus on lending standards and commitment to robust risk analysis”, the report argues.

In general, private credit managers prefer the credit security of senior secured positions and deal terms between two and six years, with a quarter having a target term of more than six years (up from only 8 percent in 2015). Meanwhile, fund-level leverage has remained low across the private credit sector, with 44 percent of all managers using none at all, according to the report.

ACC is the private credit affiliate of the financial industry advocacy group Alternative Investment Management Association.