The rise of the global private credit market has been truly remarkable – according to Preqin forecasts, the private credit market is predicted to reach $2.8 trillion by 2028.
In this article, we’ll discuss what’s happening in some private credit segments, regulatory challenges and opportunities for the EU, and why private credit is a key opportunity for the Irish funds industry.
Private credit funds and the CMU
The capital markets union (CMU) is the EU’s public policy initiative to create a genuine single market for capital across the EU. A fundamental objective for the CMU is to create an effective integrated European capital market with a harmonised set of rules for loan origination through investment funds. The EU deems this critical to providing European companies with better access to diversified financing options beyond traditional bank lending.
This places private credit at the heart of the EU public policy, and EU initiatives including ELTIF 2.0 and harmonisation of loan origination rules under AIFMD 2.0 are critical enablers for this asset class.
What’s happening in key private credit segments?
- The mid-market (typically companies with revenues of €10m-€500m) segment has become less crowded in recent times – many of the well-established private credit managers have raised “jumbo funds” with multi-billion capital commitments and have therefore shifted focus to larger ticket deals in the upper mid-market/large cap space
- Established small and medium-sized enterprises (SMEs) platform lenders (i.e. FinTechs) have moved away from peer-to-peer financing models and are now typically financed through forward flow arrangements with a diverse pool of institutional investors, including credit funds, insurance companies, pension funds, and investment banks. Many of these FinTechs use warehouse/securitisation vehicles and/or dedicated private credit funds
- Special opportunities and distressed debt funds have raised significant amounts of dry powder, but deployment opportunities have been modest, as defaults remain surprisingly subdued (despite Covid-19, surging energy costs, rampant input inflation, and spike in interest rates)
- European institutional investors are focussed on Article 8/9 Funds but complying with SFDR requirements for Article 8/9 Funds can be challenging – ESG ratings agencies typically don’t rate private companies so private credit fund managers must obtain the requisite ESG data from their borrowers. The good news for private credit managers is that there are several outsourced providers (such as IQ-EQ) who can manage the end-to-end ESG process, allowing managers to focus on credit origination and management
- Opportunities in the secondary market have increased as investors rebalance their portfolios
- Demand for open-ended structures in private credit funds is increasing. The resultant liquidity mismatch of these funds (which hold illiquid loans with typical maturities of up to seven years) needs to be carefully managed through appropriate liquidity management tools (ELTIF 2.0 and AIFMD 2.0 make such provisions)
- Increased investor concentration – the ten largest private debt funds account for >50% of capital raised in 2023, up from 35% in 2022. This appears to be at the expense of first-time managers, whose share of capital raise fell from 24% to 9% in the same period
European direct lending funds – regulatory challenges and opportunities
Europe remains a regulatory patchwork quilt, with different rules for non-bank lenders in individual EU member states. Such barriers hinder the cross-border flow of capital within the EU.
EU actions to address this include a reboot of ELTIF and an overhaul of AIFMD, which will harmonise loan origination fund rules across the EU by April 2026.
Ireland’s position today
The Irish financial services industry is well experienced at managing credit structures of varying forms. Ireland is a global centre of excellence for SPVs and securitisation vehicles (e.g. 50% of the global commercial airline fleet is financed out of Irish SPVs) and as at end Q3 2023 Irish SPV’s held assets of €1.1trillion, predominantly comprising debt securities, loan claims and securitised loans.
As a leading European centre for investment funds, Ireland has an extensive ecosystem of experienced fund service providers, with strong expertise in credit as underpinned by the €169bn of credit AUM in Irish funds, whilst Irish fund administrators also administer a significant amount of non-EU AIFs, including Cayman domiciled credit funds.
Irish regulated funds can invest in any form of credit without any regulatory leverage or concentration restrictions but can’t originate loans. However, Irish regulated funds specifically authorised as a Loan Originating Qualifying Investor AIF (L-QIAIF) can engage in loan origination. L-QIAIF’s must be closed-ended funds, can only invest in credit related assets (but may hold equity instruments issued by borrowers) and are subject to several regulatory restrictions.
The L-QIAIF has been successfully used by managers to lend across the U.S. (as an alternative to the U.S.’s “season & sell” model) and Europe in particular. However, many non-bank lenders use Luxembourg’s RAIF, which is an un-authorised AIF, with no specific loan origination rules. The status quo is set to change by April 2026 as the Lux RAIF and the Irish Loan Originating funds will both be subject to same harmonised set of loan origination rules.
A key opportunity for the Irish fund industry
Direct lenders seeking to use Irish fund vehicles can now establish their fund as either an ELTIF 2.0 or a L-QIAIF, with the rules for the latter soon set to be relaxed under AIFMD 2.0, which introduces a single set of pan European harmonised rules for direct lending funds which are less restrictive than the current L-QIAIF regime.
AIFM’s of existing L-QIAIF’s will be able to choose to avail of the AIFMD 2.0 rules upon the transposition of the latter into Irish law.
Private credit managers considering establishing a new European direct lending fund should carefully consider all the variables when choosing their fund domicile, as any new Loan Originating AIF constituted after 15 April 2024, regardless of its EU domicile, will be subject to the new AIFMD 2.0 harmonised rules. Therefore, historic benefits in choosing one domicile over another may no longer be relevant.
Irish ELTIF’s are subject to considerable interest and several closed-ended ELTIF’s have recently launched with a focus on direct lending, with many more launches expected this year.
Private credit managers should note that closed ended Loan Originating funds and non-retail investor ELTIF’s are subject to the Central Bank of Ireland’s long established 24-hour approval process thus facilitating regulatory certainty and speed-to-market.
The re-launched ELTIF product along with the harmonisation of rules for European Loan Originating funds presents a significant opportunity for the Irish funds industry to further scale up its exposure to direct lending funds, and managers will be attracted by the possibility of being subjected to a 24-hour approval process.
As a global leader in the SPV/securitisation market, and with the ongoing consolidation in the Irish banking market, there is a latent pool of readily transferrable talent that can be drawn upon by the Irish funds industry, thus underpinning Ireland’s capacity to manage and administer the expected growth in direct lending funds into the future.
Talk to IQ-EQ
IQ-EQ provides a host of services for Irish private credit funds, including AIFM, investment management, fund administration, SPV corporate services, loan administration, and ESG consulting/reporting. If you would like to learn more, contact us today.
This article has been adapted from ‘Private Credit Funds – Into the Mainstream’ by Graham Roche which was published on the Irish Funds website.
