Hannah Gannage-Stewart | Permira Credit
Permira Credit has characterised the private credit market as “a borrower’s market”, as transaction volumes continue to be relatively low and firms find themselves under pressure to deploy funds.
Despite this, the alternative asset manager’s private credit market update for the second quarter of 2024 says there is still an expectation that the second half of the year should see an improvement, as rate cuts become more widespread globally and election results are confirmed.
Fears of recessions across major economies seem not to have materialised, however the report pointed to ongoing inflationary pressure, as well as geopolitical uncertainty.
“While changes in governments worldwide are unlikely to have major or long-lasting impacts on credit markets, the uncertainty surrounding upcoming elections has meant that investors have been taking a more cautious approach,” the report said.
Tightened bank lending was highlighted as a positive for opportunistic private credit lenders, particularly those focused on the lower mid-market.
“The global geopolitical backdrop is mainly affecting the number of lenders rather than the number of borrowers,” the report said. “Since 2022, banks have pulled back significantly and tightened their credit processes, especially in the lower mid-market, and they are being far more selective on the types of deals they do”.
Meanwhile, Permira pointed out a different dynamic in the liquid credit market, where US and European collateralised loan obligation (CLO) issuance in the first five months of the year were the strongest in the history of the market.
This has led to a greater demand for primary credit, and a major impact on re-pricings due to low M&A activity. There has also been a significant tightening in the secondary market, due to CLOs having substantial deals in the primary market.
More broadly, Permira anticipates that interest rates will gradually start to fall across Europe and the UK later this year, following a deposit rate cut by the European Central Bank in June. This is likely to take longer in the US.
Overall, despite the ongoing geopolitical uncertainty and slow return to growth, demand for credit products is expected to remain strong and overall deal activity is anticipated to increase in the second half of 2024.
Permira added that “while private credit will remain the key product and market leader, especially across the mid-market space”, broadly syndicated loans are expected to gain market share, with the two markets expected to co-exist “in mutually beneficial ways”.
