Private debt has solidified its role as an alternative asset class, with providers offering benefits such as more leverage, privacy, and certainty of execution compared to traditional banking options.

The recent report ‘Private Debt Is Here to Stay in European LevFin, but Competition Intensifies’, from Fitch Ratings, highlights how increased competition means that private debt direct lending will need to adapt to normalized conditions. The report discusses a number of challenges and changes that will impact private debt in the future:

• Scarcity of new buyout deals means that all credit providers will now compete for the same financing opportunities. This may force private debt funds to look to existing issuers, and cooperate with syndicated lenders, in providing first-lien unitranche co-existing with first-lien TLB and senior secured notes.
• Fitch Ratings expects private debt providers to retain pricing power in the less competitive part of the European leveraged credit market that targets smaller issuers.
• Fitch Ratings suggests collateralised loan obligations (CLOs) of private debt will arrive in Europe soon, as providers seek funding flexibility, allowing them to use more leverage to compete on lower coupons and meet return expectations.
• In Europe, private debt funds are forming clubs of lenders among themselves and their limited partners (LPs) to underwrite large leveraged buyouts (LBOs).
• As LPs increase their exposure to private debt, many will require credit ratings for regulatory purposes.
• Central banks’ rate cuts may mean that debt providers need to add more leverage on assets with lower coupons, or move out the risk spectrum to garner higher yields, or to maintain excess returns as those achieved in 2022-2023, when rates were high.

For the full report, follow this link. Please note that a Fitch Ratings account may be necessary to access the report.