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$100bn in fresh financing deployed to world's businesses in 2020

Tuesday, November 24, 2020
Opalesque Industry Update - Private credit managers will provide borrowers with more than $100bn of fresh financing during 2020, according to new research published by the Alternative Credit Council (ACC) and Allen & Overy LLP (A&O).

The ACC's 6th annual Financing the Economy research paper shows that private credit managers have provided vital support to borrowers during 2020. As well as new lending, private credit managers have also supported COVID-affected businesses with flexible finance solutions and pragmatic approaches towards forbearance or recapitalisation.

The annual global survey of 49 firms with an estimated private credit AuM of $431bn notes that COVID-19 will highlight differences in origination, documentation standards and risk management within the sector. Existing exposure to cyclical or COVID-affected sectors is also affecting a private credit manager's ability to take advantage of investment opportunities during the current downturn. These factors are likely to drive dispersion of performance within the sector during 2020 and 2021.

Data from the report shows that 88% of firms expect to continue raising capital for their existing strategies, and 98% of respondents plan to raise capital for some form of private credit strategy next year. This capital will particularly benefit SMEs, mid-market and unlisted businesses who are underserved by traditional lenders or were unable to access government liquidity schemes.

The report highlights how investors and private credit managers are positioning themselves in anticipation of borrowers' changing finance needs in 2021. Performing loans in the SME and mid-market are expected to be the biggest opportunity to deploy capital in 2021, with the sector also anticipating greater investment in liquidity/bridge finance or special situations lending.

Investor appetite for private credit remains undiminished. Ongoing economic uncertainty and the low interest rate environment are reducing the appeal of traditional fixed income assets. This is driving allocators towards private credit assets that can generate income, while also offering them diversification and a hedge against ongoing economic disruption.

Jiri Krol, Global Head of the Alternative Credit Council commented: "Private credit managers have stepped up and proved their value in 2020 by continuing to support existing businesses and lend to new projects, despite the substantial disruption in the economy. Private credit provision will drive the recovery in the mid-market sector as traditional sources of finance will continue to retrench. So although it may be still too soon to tell, the early signs point to the industry passing an important structural stress test, and doing so without the levels of government support provided in the public markets."

Sanjeev Dhuna, a London-based Allen & Overy partner and head of the firm's direct lending practice, said: "We are increasingly seeing direct lenders being considered by borrowers and sponsors alongside underwritten and bank club financings. The direct lenders offer speed of execution and certainty of pricing, and in recent months we have seen these lenders play in the structured financing market, offering liquidity for delayed exits in order to return cash to investors. The direct lenders are a staple part of the mid-market financing scene and they have an increased presence in the large cap market."

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