During the “Where’s the Equilibrium in the Financing Market” panel at the IPEM conference in Cannes yesterday (24 January), private credit decision-makers shared views on the appeal of the asset class, its relationship with traditional banks and how it will evolve this year.

When asked what makes private credit so adaptable, Amit Bahri, co-head of European direct lending at Goldman Sachs Asset Management, pointed to pragmatism.

“Private credit became mainstream about five years ago. Borrowers see the value that a private credit provider brings, particularly in the large-cap segment,” he said. “So long as private credit is pragmatic on the yields, I personally think that the penetration of private credit will continue to grow and there is no cap on how big a company will seek private credit vs public credit, which would have been the case five years ago.”

Fellow panellists nodded in agreement. “Private credit is driven by flexibility. We’re clearly in a period of less issuance and the proportion of private credit provision has increased, so when people need flexibility and less structured terms, they come to private credit,” said Appu Mundassery, portfolio manager at DB Investment Partners.

As to whether private credit is it too much of a good thing, Mundassery said, “The returns today are probably not the returns we can expect on a three-plus year horizon.”

“I think we must take a view towards a more permanent solution to make it more palatable for users of these instruments,” he added.

Nael Khatoun, managing director and portfolio manager at Oaktree Capital Management said, “Europe has always been a bank-led market and when the banks have constraints, private credit has filled the gaps. Irrespective of the market environment, private credit is here to stay. About ten years ago, Europe was 80% bank-led and that has reversed itself. We have found some equilibrium, irrespective of where the market is.”

Providing a round-up of 2023, Goldman’s Bahri said: “Q4 [2023] felt like 2021,” referencing an uptake in deal-flow.

“In the first three quarters of last year, sponsor M&A volumes were anaemic, but I think Q4 was different—almost 70% of what we invested in in Europe happened in Q4,” he said.

As to whether he predicts this will continue, Bahri said, “I think we will see motivated sellers and motivated buyers. The pipeline is looking very good—it’s a healthy mix of new M&A processes, refinancings and opportunities within our portfolio”.

“Last year we didn’t see a lot of demand from borrowers for subordinated capital, and I think that’s going to evolve this year,” Bahri added.

Private credit players are also looking to have a broader toolkit going forward.

“To take a medium-term view, we are trying to expand the product suite. Where there’s not as much primary buy-out, we will look at participating in some of the other businesses we have, which are pricing quite attractively,” said Mundassery. “We will also look at potential growth areas. In addition to corporate direct lending, we are seeing a lot of new entrants in asset-based finance. It’s an area that’s becoming more attractive.”

Speaking for the lower end of the market, Khatoun said that the periods of quickest deployment happen when there’s uncertainty in the market: “That uncertainty can take many forms, in the UK it could be Brexit or COVID-19.”

“Those periods which slow down decision making on behalf of the banks, makes private credit really the only alternative option,” he said.

Concluding the panel, Khatoun said he expects that this year, there will be a trend of banks and private credit lenders working together more closely. “You only need to look at tie-ups like Brookfield and Societe Generale to understand how two providers of capital will come together over time.”

In September it was announced that Societe Generale and Brookfield Asset Management had formed a joint private debt fund. The initial fund is targeting a total of EUR 10bn over the next four years and will launch with EUR 2.5bn of seed funding at inception.