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MARKET DRIVERS

October 2019 

 

Research shows that private credit funds stabilise markets and promote ‘economic resilience’

 

Several world bodies, including the Bank for International Settlements and the IMF, pointed in 2018 to elevated prices in leveraged loan markets as a potential threat to the financial system. However, a new research paper ‘Nonbank Credit’ by the University of Pennsylvania makes the opposite case for certain parts of the growing alternative credit sector.

 

Central to the benefits cited by researchers is the typical structural feature that private credit funds can deploy patiently into bear markets over several years, when other financing sources suffer redemptions. The paper points out that assets under management held by private debt funds are expected to be over $1 trillion by 2020. The sector can now be seen as a meaningful participant in the financing system for private companies, according to researchers.

ESMA warns that “40% of European high yield bond funds could suffer liquidity shortfall” in the event of a market dislocation

 

The European Securities and Markets Authority (ESMA), referring to a “pure redemptive shock scenario” has calculated that up to 40% of high yield bond funds which are expected to provide their investors liquidity, often daily, are at risk of failing to do so in such a scenario.

 

The ESMA tracks $9.3 trillion of UCITS fund assets in Europe. While the majority of high yield credit funds will be able to deliver redeeming investors their capital, those that cannot will in such a scenario be forced to offload less liquid credits. 

More than half of global banks are generating insufficient returns to survive a downturn - McKinsey

After a period of prolonged low interest rates, an economic slowdown could wreak havoc in the banking sector, warned the consultancy McKinsey. “Whilst imaginative institutions are likely to come out leaders in the next cycle, others risk becoming footnotes to history” states their new report. 

Citing both shortfalls in revenue and the likely loss of business to technology-deploying challengers, McKinsey warns that “merging with similar banks or selling to a stronger buyer (ahead of any crisis) may be the only option if reinvention is not feasible”.

 

These cyclical and structural forces set to keep banks on the sidelines present both a challenge in the form of potentially slower growth and an opportunity for alternative credit platforms to step in for SME borrowers. 

Highlights

As the private credit market deepens and expands, large investors are striking new alliances and building new ways to gain access...

Insurers Innovate for the Lower Middle Market 

Credit Funds of Funds Buck the Trend

SME Platforms Bring LP Funds