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Message: <blockquote data-quote="LionHeart" data-source="post: 153741" data-attributes="member: 27791">The Prospects of Private CreditAhead of the Finance Commercial Awareness Office Hours, I thought this would be quite topical.The world's largest asset manager, BlackRock, recently predicted that the Private Credit Market will double to $3.5 Trillion by 2028. The market is expected to grow at about 15% CAGR (Compound Annual Growth Rate) over the next five years.What has propelled the growth of Private Credit?For investors (LPs), it promised smoother and stronger returns compared to High-Yield bonds and Leveraged loans.Since these are private (thus mostly untraded) assets, their value is not as volatile as leveraged loans or traditional bonds. Note that Private Credit lacks a secondary market. Therefore, valuations for private debt are done over a longer period. This is not the case for loans and bonds.This is also enabled by the lack of transparency on credit risk throughout the deal's lifecycle. There is limited regulation and standardisation of documents compared to Broadly Syndicated Loans (BSL), for example.Furthermore, direct loans were more attractive when interest rates were rising. Usually, direct loans adopt a floating rate instead of the fixed rates that public market bonds pay.Finally, and maybe most importantly, banks have been pulling back lending. With higher interest rates and scarce capital to lend (due to banks being required to maintain higher levels of capitalisation), private lenders can negotiate better origination fees for looser covenants. What are driver trends going forward?It is important to note that though Private Credit started out as lending to SMEs who otherwise did not have access to bank loans and BSLs, the trend now has been to lending to Private Equity portfolio companies and to GPs themselves (see below). Hence, Private Equity trends will determine Private Credit trends to a large extent.We can expect the increasing deal size to continue. There are advantages to investing in larger companies. Bigger companies tend to grow because their products or services are high-quality, have strong management teams, usually have a compelling PE sponsor, and are likely to be more diversified. All of this de-risks the investment.Another is Net-Asset-Value (NAV) lending. NAV lending involves providing finance to the GP of a Private Equity Fund; the lender's loan is secured against the underlying assets in the fund's portfolio. Hence, GPs are generating liquidity at the NAV of the portfolio.This has grown quickly, as NAV facilities offer a route to liquidity to provide a bridge for LPs waiting for returns from the sale of assets whilst also being a source of capital to keep driving value creation (I think you can see the controversy behind this).What are the potential limiters going forward?It follows that since banks are pulling back lending, non-banks are taking up risks that banks are unwilling to take. Lenders that take that market share tend to be hardest hit during a downturn. High-interest rates are great for investors up to a certain point. Such expensive debt can crush companies. UBS forecasts that the default rate of private credit borrowers will spike to 10% next year. Already through August, US Corporate bankruptcy filings have jumped to 459, exceeding the combined total of the last two years.This may lead to much more conservative lending and create a credit crunch for Private Credit as well.Also, as the SEC continues to implement regulations of private funds, the advantages Private Credit has will be diminished if it is subject to a burden of compliance and disclosure requirements. Goldman Sachs eyeing up and preparing for a potential secondary market also indicates this advantage may be lost.How does this affect Law firms?Law firms with strong Debt finance teams and Private Equity clients can capitalise. The nature of these lending agreements means that there is more scope for negotiation as covenants do not have to be as tight, creating more scope for drafting and a greater ability to tailor deals to the client's needs. We have already seen this with Kirkland advising Finastra (portfolio company of Vista Equity Partners) on its $5.3bn refinancing from Oak Hill Advisors. However, a challenge for these law firms is that their debt finance teams are debtor-orientated, normally representing the Private Equity sponsor.I'd like to think that there may be some lateral hires to bolster the creditor side of their debt finance teams to capitalise on these deals on both sides.</blockquote>

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