Private Credit Expansion: How Private Equity Firms Are Leveraging New Opportunities

Private equity firms have shown significant interest in private credit as an alternative asset investment avenue. According to the International Monetary Fund (IMF), the private credit market attained a record $2.1 trillion in assets and committed capital globally last year. The private credit market is primarily dominated by non-bank financial institutions, such as investment funds, which provide loans to corporate borrowers. In the United States, the market share of private credit is quickly catching up to that of syndicated loans and high-yield bonds. In this blog, we will explore the expanding realm of private credit and see how private equity firms are capitalizing on new opportunities to enhance portfolios and generate attractive risk-adjusted returns.

The Rise of Private Credit

The private credit market emerged three decades ago as a financing source for companies too large or risky for commercial banks and too small to raise debt in the public market. In recent years, it has grown significantly, driven by its speed, flexibility, and attentiveness, all of which are valuable to borrowers. Tightening regulatory requirements for banks, increased demand for non-bank lending, and attractive risk-adjusted returns also contributed to the rapid growth of the private credit market.

In its 2021 private equity outlook, global law firm Dechert reported that 45% of surveyed private equity firms had increased their use of private credit financing in buyouts over the previous three years.¹

Private credit has outperformed other asset classes, delivering high returns with relatively low volatility.²

Diversification of Investment Strategies

As a result of all these factors, leading private equity firms are pivoting away from traditional buyouts and exploring the scope of private credit and infrastructure investing. Jim Zelter, Apollo’s co-president, said that in an era of higher rates, there were “unprecedented” returns available in private credit.³ Private credit has become increasingly important in private equity. Institutional interest in private debt fundraising has grown 4.4 times from $44B in 2010 to $192B in 2021. Middle-market companies, particularly those owned by PE sponsors, primarily use direct lending. They accounted for nearly 60% of all private debt fundraising, exceeding $100B in 2021. Over $500B of existing debt from middle-market companies is set to mature between 2021 and 2026, highlighting the need for private debt financing.⁴ By providing debt financing to these companies, private equity firms can expand investment strategies beyond traditional equity investments. This allows Private equity firms to participate in different stages of the capital structure and access a broader range of industries, diversifying portfolios and mitigating risk. Ultimately, this enhances the overall risk-adjusted return profile of the private equity firm.

Access to Higher Risk-Adjusted Returns

Private credit investments often provide attractive risk-adjusted returns compared to traditional fixed-income investments. By structuring bespoke lending solutions, private equity firms can negotiate favorable terms, including higher interest rates, collateral, and covenants.

Active Portfolio Management and Credit Monitoring

Private equity firms leverage expertise in active portfolio management and credit monitoring to navigate the private credit landscape effectively. With thorough due diligence and rigorous credit analysis, private equity firms can assess the creditworthiness of potential borrowers and identify attractive investment opportunities. This active approach allows private equity firms to select investments aligned with a preferred risk appetite, investment thesis, and return objectives.

Capitalizing on Market Inefficiencies

Private credit markets are often less efficient than public markets, creating opportunities for private equity firms to exploit pricing inefficiencies. By conducting in-depth research and leveraging extensive networks, private equity firms can identify mispriced assets, undervalued companies, and unique investment opportunities. This ability to capitalize on market inefficiencies gives private equity firms a competitive edge in the private credit space.

Furthermore, private equity firms have recognized the potential of private credit as a distinct asset class and actively sought to capitalize on the expanding market. By diversifying investment strategies, accessing attractive risk-adjusted returns, actively managing portfolios, capitalizing on market inefficiencies, and leveraging extensive operational expertise, private equity firms can enhance portfolios and generate attractive returns for investors.

Technology can strengthen all of these advantages. The IVP Private Funds Platform is designed to help asset managers launch or manage private credit and private equity strategies efficiently. With more than two decades of experience working with asset managers, IVP has become adept at solving the investment data management problems associated with complex and bespoke asset classes. IVP for Private Funds gives funds a proven way to establish a golden source of truth. This comprehensive solution allows private equity, private credit, and private debt fund managers to enter data once and track it throughout the trade lifecycle with complete transparency. It helps automate workflows for investment management firms, reducing operational risks, improving efficiency, and performing complex data analysis. It also offers a 360-degree view of deal lifecycle management that can be used for various portfolio data management functions, such as streamlining data collection, providing analytical dashboards, and generating insights and reporting. Standardized financial data templates eliminate manual intervention, enabling investment managers to identify patterns in critical metrics across portfolio companies, sectors, and industries.

Other important features of IVP for Private Funds include:

• Fully customizable for any data type and reporting format
• Pipeline management tools to streamline pre-investment workflows
• Out-of-the-box reporting dashboards
• KPI tracking and management
• Tracking and management of financials and covenants
• Built-in data adaptors to third-party providers and aggregators
• Portfolio performance and compliance management tools
• Fully customizable closed-deal blotters with data audit capabilities
• Real-time mobile access to portfolios

Learn more about IVP for Private Funds and see how your fund can implement a golden source of truth that helps your fund grow. Or contact sales@ivp.in to schedule a live or online demo.

1. Private Credit’s Increasing Role in Private Equity Industry
2. Fast-Growing $2 Trillion Private Credit Market Warrants Closer Watch
3. Private Equity Firms Pivot Away from Traditional Buyouts
4. Private Credit’s Current Participation in PE Deals