Private debt is increasingly seen as an asset class with high potential. In a new white paper co-authored by IQ-EQ Luxembourg and Arendt, we examine private debt from an operational angle.
Also described as non-bank lending, alternative lending or private credit, private debt is an asset class comprised of higher-yielding, illiquid investment opportunities, typically targeting middle-market corporates across a wide range of strategies and risks, from senior secured debt to distressed debt.
Private debt plays an essential role in financing the real economy. It offers an alternative financing option outside of the traditional banking system. This has been a welcome change to the post-2008 markets for borrowers and investors alike. Private debt offers borrowers speed, flexibility and customisation, whilst lenders and investors benefit from attractive risk and return propositions.
Private debt can be a more effective funding channel than traditional bank lending, hence why it's been picking up speed with no signs of slowing.
Alternative lending is already an important asset class in the U.S. and has grown significantly in Europe recently. In a post-pandemic environment, where banks and more reluctant than ever to take on higher-risk loans, continued financing of the real economy is a priority and makes the role of non-bank lending even more essential. According to Pitchbook, private debt accounts for 10-15% of total assets under management in the private markets. And Preqin predicts that private debt will be one of the fastest growing asset classes over the next five years, with a projected increase of 11.4% annually.
With momentum comes attention from regulators and policymakers. In the context of its Capital Markets Union initiative, the European Commission has recently introduced a proposition to amend the Alternative Investment Fund Managers Directive (AIFMD) in respect of loan origination funds. The Commission is proposing to establish a specific, harmonised regulatory framework for loan origination funds.
In this context, the following paper looks at private debt from an operational angle. Who are the key agents involved, and what are the potential pitfalls they should know about ahead of increased regulatory scrutiny? Throughout the paper, we cover roles and responsibilities for private debt portfolios at each stage of the lifecycle.