Private Debt News Issue #6: The Shifting Sands of Private Credit (3.30.24)

From Talent Wars to Fossil Fuel Financing – Navigating the Evolving Landscape of Private Credit

The private credit market continues to be a dynamic and ever-changing landscape, with new developments emerging at a rapid pace. From the intensifying battle for top talent to the increasing role of private credit in financing fossil fuel projects, this week's Private Debt News delves into the latest trends and events shaping the industry.

1. The Talent War Heats Up: Private Credit Firms Pull Out All the Stops

As the demand for nonbank lending surges, private credit firms are locked in an intense battle to attract and retain top talent. With activity in the sector reaching new heights, especially in the wake of central banks' aggressive interest rate hikes, firms are expanding their headcount to keep pace with the growing market.

The competition has become so fierce that some firms are even taking each other to court, as evidenced by the recent lawsuit filed by Barings against Corinthia Global Management after more than 20 Barings private credit professionals jumped ship. This "corporate raid," as Barings describes it, highlights the high stakes involved in securing the best and brightest in the industry.

To stay competitive, private credit firms are offering increasingly attractive compensation packages, with pay levels for credit distribution and capital formation professionals outpacing those in other strategies. While the pay range is broad, the rapidly expanding private credit segment offers junior employees better prospects for accelerated career advancement compared to more mature industries.

As the war for talent rages on, firms that prioritize employee retention and create compelling opportunities for growth and development will be best positioned to navigate the challenges ahead.

2. GGV Asia's Bold Move: Venturing into Private Debt After US Split

In a significant development, the Asia business of venture capital firm GGV Capital, now rebranded as Granite Asia following its split from its US counterpart, is considering raising money to invest in private debt for the first time. This move comes as the firm, known for its early investments in Chinese tech giants like Alibaba, ByteDance, and Xiaomi, adapts to the evolving needs of businesses and investors in the region.

Granite Asia, led by Jenny Lee and Jixun Foo in Singapore, is planning to assemble a private credit investing team as early as the second half of this year. The firm recognizes the growing importance of private credit as a source of funding for businesses across various sectors, from tech startups to real estate companies.

In addition to potentially entering the private debt space, Granite Asia will continue to invest in technology startups in the region and is exploring private hybrid funding, which combines equity and debt. The firm's willingness to diversify its investment strategies reflects the shifting landscape of the Asian market and the need for investors to adapt to new opportunities and challenges.

As Granite Asia embarks on this new chapter, its moves will be closely watched by industry players eager to see how the firm's expertise and network in the Asian market will translate to the private credit space.

3. Investcorp's Bullish Outlook: Private Credit Remains a 'Great Opportunity'

Despite growing concerns about a potential bubble in the private credit market, Mohammed Al Ardhi, executive chairman of Bahrain-based alternative asset manager Investcorp, remains optimistic about the asset class's prospects. In a recent interview with Bloomberg TV, Al Ardhi stated that investing in private credit is still a "great opportunity," citing the difficulties traditional banks face in boosting lending as a key factor driving the growth of private credit funds.

Investcorp, which manages around $13 billion in its credit management unit, is not alone in its bullish stance on private credit. Blackstone Inc. CEO Steve Schwarzman has also touted the industry's potential for further expansion, pointing to the low default rate on private credit loans as a testament to the asset class's resilience.

As more investors seek attractive risk-adjusted returns in an increasingly complex and uncertain economic environment, the demand for private credit is expected to remain strong. However, as the market continues to grow and evolve, managers will need to demonstrate a commitment to rigorous underwriting standards and risk management practices to maintain investor confidence and navigate potential challenges.

4. Europe's Private Credit Industry Outperforms: New Benchmark Index Reveals Strong Returns

A new benchmark index, the European Senior Debt Index (ESDI), has shed light on the impressive performance of Europe's private credit industry over the past five years. Produced by Lincoln International investment bank, the index shows that median returns for private credit in Europe have outpaced those of leveraged loans by more than 3 percentage points.

The ESDI, which compiles data from over 300 companies and approximately €55 billion in assets, provides valuable insights for investors looking to allocate capital to the growing private credit market in Europe. As the first index of its kind for the region, the ESDI fills a crucial gap in the market, offering much-needed transparency and benchmarking data for an asset class that has traditionally lacked comprehensive pricing information.

The strong performance of private credit in Europe, as evidenced by the ESDI, is likely to further fuel investor interest in the asset class. As more institutional investors, such as sovereign wealth funds and insurance companies, seek to capture the higher returns offered by private credit, the market is poised for continued growth and expansion.

However, as the private credit industry in Europe matures and becomes increasingly competitive, managers will need to differentiate themselves through specialized expertise, rigorous due diligence, and strong relationships with borrowers to maintain their edge and deliver consistent returns to investors.

5. Private Credit's Growing Role in Fossil Fuel Financing: Filling the Gap Left by Banks

As banks, particularly those based in Europe, increasingly retreat from financing fossil fuel projects due to regulatory and reputational concerns, private credit managers are stepping in to fill the void. Data from Preqin reveals that the value of private credit deals in the oil and gas industry surged to over $9 billion in the 24 months through 2023, up from just $450 million in the preceding two years.

This trend is expected to accelerate in the coming years, as banks face mounting pressure to align their lending practices with stricter climate regulations and ESG considerations. For mid-sized fossil fuel companies with weaker environmental, social, and governance policies, access to traditional bank financing is becoming increasingly challenging, making private credit an attractive alternative.

While the shift towards private credit financing for fossil fuel projects may raise concerns about transparency and accountability, it also presents opportunities for managers with specialized expertise in the energy sector. As the market evolves, private credit firms that can navigate the complex regulatory and ESG landscape while providing flexible and tailored financing solutions to borrowers will be well-positioned to capitalize on this growing trend.

However, as the world transitions towards a low-carbon future, private credit managers will need to carefully consider the long-term risks and opportunities associated with financing fossil fuel projects, and ensure that their investment strategies are aligned with the evolving needs and expectations of their investors.

6. Apollo's Matthew Michelini on Asia's Private Credit Opportunities

Matthew Michelini, partner and head of Asia-Pacific for Apollo Global Management, recently shared his insights on the key investable areas for private credit in Asia during the Milken Institute conference in Hong Kong. According to Michelini, the three main opportunities lie in asset-backed lending, development lending, and large investment-grade lending that cannot be easily accommodated on banks' balance sheets or through syndicated lending markets.

Michelini also highlighted the potential for hybrid alpha investment-grade lending, which is conducted on a specialized basis, as another area of interest for private credit investors in Asia. As countries in the region focus on greater self-sustainability, particularly in the energy sector, private credit managers with expertise in these areas may find attractive investment opportunities.

The growing importance of RMB onshore opportunities in China was also emphasized by Kevin Lu, partner and chairman of Asia and global executive board member at Partners Group. As the private credit market in Asia continues to evolve and expand, managers who can navigate the unique challenges and opportunities presented by the region's diverse economies and regulatory environments will be well-positioned to succeed.

7. The Safe-Guard Products Deal: A Milestone for Private Credit

In a significant development for the private credit market, Stone Point Capital Markets recently led a $1.24 billion senior secured financing to support Safe-Guard Products, a provider of outsourced finance and insurance solutions to original equipment manufacturers and dealerships. The financing, which comprised a $1.235 billion term loan and a $75 million revolver, attracted participation from a range of prominent private credit managers, including Apogem Capital, Apollo Global Management, Ares Management, Blackstone, Cliffwater, Diameter Capital Partners, Jefferies Financial Group, and KKR.

The Safe-Guard Products deal represents a milestone for the private credit market, showcasing the ability of private credit managers to provide sizeable and complex financing solutions to companies in need of capital. The inclusion of a portability feature in the deal also highlights the flexibility and innovation that private credit managers can bring to the table, offering borrowers customized solutions that may not be available through traditional banking channels.

As private credit continues to grow and evolve, deals like the Safe-Guard Products financing serve as a testament to the increasingly important role that private credit managers play in the broader corporate financing landscape. As more companies seek alternative sources of funding to support their growth and operations, private credit is poised to become an even more significant player in the years to come.

Conclusion

The private credit market continues to be a dynamic and fast-moving space, with new developments and opportunities emerging at a rapid pace. From the intensifying battle for top talent to the growing role of private credit in financing fossil fuel projects and the landmark Safe-Guard Products deal, this week's Private Debt News highlights the many ways in which the industry is evolving and adapting to meet the changing needs of borrowers and investors alike.

As the market continues to grow and mature, private credit managers will need to stay agile and innovative, leveraging their specialized expertise and flexible financing solutions to capitalize on new opportunities and navigate the challenges ahead. Whether it's venturing into new geographies and asset classes, as in the case of GGV Asia, or providing customized financing solutions to companies in need of capital, as with the Safe-Guard Products deal, private credit managers who can adapt to the shifting sands of the market will be best positioned to succeed in the years to come.