With economies fragile, the largest capital deployment opportunities are likely to be in rescue financing, real estate, infrastructure and direct lending.
Any rise in business failures as economies continue to struggle would put increased pressure on banks’ balance sheets and ability to lend. Small- and medium-sized enterprises could be especially vulnerable to any dip in the availability of bank credit. This could create an opportunity for private credit funds to fill the breach by helping to finance businesses that have strong growth potential but little access to mainstream funding. However, few credit funds are focused on small- and medium-sized lending.
Further growth opportunities include acquisition of distressed debt and debt for equity deals, especially in Europe and the US. Secondary debt markets have rallied substantially since lockdown. Distressed businesses are picked over, in general. But there’s potential both because of the large amounts of dry powder in the market and the search for yield in an environment of ultra-low interest rates.
We believe that by 2025, private credit in Europe, which is already largely fund-driven, not bank-driven, will certainly be fund-driven. Direct lending will expand and will compete with syndicated bank facilities. Regulation of the sector is likely to increase. We also expect to see consolidation in direct lending, as small direct lenders fold into larger platforms.