The past decade has seen a rising trend in the private debt industry: if bank loans grew 180% from 2010 to 2022, this asset class grew by 278%.

This phenomenon began as a result of regulators imposing higher capital requirements on banks in order to ensure the solvency of the sector, as it is essential for the functioning of the economy.The banking regulation has been developing over the years, and after the great financial crisis. Banking regulations have been developing over the years, and after the great financial crisis of 2008, the following is implemented Basel 3was implemented, which corresponds to a set of internationally agreed measures to mitigate risks inherent to the banking business. These measures, which provide security to the market with respect to the operation of the banking sector, end up being an opportunity for the actors that are not regulated by such standards.

Going forward, the outlook for private debt is positive. The failure of some U.S. regional banks has made regulators and investors nervous, so banks are lending less due to a more unstable depositor base, and are now building up higher levels of capital reserves in preparation for possible increases in regulatory requirements, as regulators have already mentioned the importance of higher reserves after the events of the beginning of the year.

On the other hand, There has been less demand for bank loans because financing has become relatively more expensive than private debt as a result of the interest rate increases seen in the markets due to the increase in inflation resulting from the Covid 19 pandemic. as a result of the interest rate increases seen in the markets due to the increase in inflation resulting from the Covid 19 pandemic. In addition, the prospect of weaker growth is causing banks to become more restrictive in order to avoid losses, restricting their supply.

All of this is reflected in the latest Senior Loan Officer Opinion Survey on Bank Lending Practices (October 2023) which addresses changes in standards, terms and demand for bank lending to businesses and households over the past three months. According to the survey, lending to businesses has been subject to tighter standards, and Among these restrictions is that banks may now require higher levels of collateral, a stronger credit history or more favorable terms before extending credit, along with weaker demand for commercial and industrial loans to businesses of all sizes.

Interest rates charged by banks are less expensive than private loans in general, but the gap has narrowed to levels not seen since 2008.

However, not everything is risk-free. Private debt faces the same risks as banks, and for the first time, they also face an economy with higher interest rates and an economic slowdown that could be prolonged (unlike the pandemic, where the economy grew rapidly due to fiscal stimulus). With this, delinquencies on these loans are expected to increase, affecting the growth of this type of asset. For this reason, it is important to continue to be cautious and prevent possible deterioration in investments, which is why the selection of a good private debt manager is fundamental when investing.

Vincent Dourthé

Private Debt Team Fynsa AGF