The following article, by an offshore law firm, explores the rise of private credit, how it works, and its place in wealth management.
The following article is by Michelle Flett-Massabias, a partner in the BVI office of offshore law firm Harneys. She said private credit, which has expanded rapidly in recent years, was stimulated to some extent until two years ago by more than a decade of ultra-low interest rates and tighter capital controls on traditional banks after the 2008 market crash. Let's talk about the world of. .
Rising interest rates since the pandemic have changed the equation. The International Monetary Fund recently raised a red flag about the potential systemic risks in the growth of such “shadow banking.” Still, our editorial team continues to regularly talk about the benefits of private credit and why wealth managers should use it for their clients. We will cover this market with a balanced perspective, paying attention to how long-term financial trends can be repackaged in new ways.
Editors are happy to share this content. Usual editorial disclaimers apply. If you would like a response, please email tom.burroughes@wealthbriefing.com.
The rise of private credit
Global events, especially over the past decade, have done nothing if not reinforce the notion that change is constant. One area where this maxim certainly resonates is that the global financial system itself is witnessing a changing landscape, with a variety of alternative financing strategies being deployed by private companies replacing the dominance of traditional bank financing. It is within the global financial system that is characterized in many ways by the appearance of credit lender.
The vacuum created by the significant setback in banks' position has left the door wide open to alternative sources of financing for borrowers. The somewhat subtle changes in the lending market seem certain to continue, as private credit (or private debt, as it is also called) continues to accumulate more and more of the market share that traditional bank lending enjoyed. .
Some might say that what was supposed to be nothing more than lightning in a bottle has taken root and grown wings since its appearance. The slow but steady rise in alternative credit began over a decade ago as a direct result of what is now commonly known as the Global Financial Crisis. The meltdown across the global financial system that occurred in 2007-2008 created certain market conditions that created investor demand for alternative sources of credit to fill the gaps left by the traditional banking system. Ta. Tough times often act as a catalyst for change, and the prevailing conditions at the time ultimately gave life to alternative financing sources that are active within today's financial system.
This market has grown to be valued at approximately $1.4 trillion as of early 2023, and is estimated to reach a growth trajectory of $2.8 trillion by 2027. By any measure, this shows the importance of private credit operated by the world's financial institutions and financial institutions. This sector ranges from private equity to various types of funds to institutional investors such as hedge funds. Alternative investment funds have large amounts of capital at their disposal for lending.
This makes the market an undeniably important source of financing for companies seeking capital, and as opposed to the borrower's perspective is the lender's perspective within the market. The market operates with a dual-benefit objective, and as an investment strategy, engaging in private lending has proven to be highly advantageous for many private financial institutions' investment portfolios. To the extent that this situation continues, it is likely that alternative sources of financing related to private credit will continue to capture the market share they have carved out.
The impact of private credit
Bank lending has increased in recent years due to the impact of recent global events related to the COVID-19 pandemic, rising inflation, and continued regulatory pressure on banks (particularly issues such as regulatory capital requirements for banks). has been suppressed. For now, the worst of the pandemic appears to be in the rearview mirror, and although some indicators point to interest rate easing on the horizon in the not-too-distant future, regulatory pressures seem unlikely to abate. It will be done. At a macro level, this means that the favorable environment for private credit trading that has developed over the past few years is likely to continue.
It's hard to deny the appeal of the flexibility that comes with private financing. The availability of customized lending solutions means that, unlike traditional bank lending (which in many ways remains tied to business practices and can be seen as onerous), private credit lenders offer borrowers access to facilities. This means we have the flexibility to provide tailored solutions to suit your size and type of financing. Even the timing of closing the transaction all takes into consideration the specific needs of the borrower. Many private credit transactions also feature variable interest rates that adjust as interest rates change. The inherent flexibility of this approach is attractive to many borrowers, especially when compared to alternative funding sources such as fixed-rate bonds.
More recently, we have seen an increase in private credit transactions involving large corporations, but mainly small and medium-sized enterprises (arguably the backbone of most economies) that require capital both for operational and expansion purposes. have benefited the most. , found a ready market in private credit.
The options available to small businesses have been a welcome boon in recent years, especially at a time when finances have been tight for many small businesses.
Whether the solution for a particular borrower is in the form of direct financing (often available to non-investment grade, non-investment companies that provide a stable income stream), mezzanine financing, or preferred stock (usually in the form of junior) Will it be provided? capital, which provides equity incentives to private lenders while providing a source of subsequent debt to borrowers) or distressed debt (which allows financially distressed companies to overcome balance sheet restructuring and operational stabilization) For borrowers, there is an undeniable appeal in doing business with a lender that: A flexible and innovative approach to lending (in stark contrast to traditional bank lending).
Navigating relationships: private credit and the offshore world
Having established its value to the global credit system, private credit now plays a role in facilitating global capital flows in a manner not dissimilar to the role played by traditional bank lending. Masu.
Increasing demand for credit by borrowers and risk appetite by investors have led to increased market share in Europe, the United States, Asia, etc., and banks are now functioning at a similar level to banks in the context of cross-border finance, which typically involves both parties. Now you can. onshore and offshore elements.
The same characteristics that make the use of offshore vehicles resident in jurisdictions such as the British Virgin Islands and the Cayman Islands attractive for bank loan financing transactions, such as tax neutrality, efficient regulation, and well-established legal doctrine. ) also applies to non-financial transactions. bank loan.
The flexibility associated with private credit transactions meshes well with the flexible nature of offshore corporate vehicles that characterizes many cross-border financial transactions. The commonalities between the private credit world and the offshore world will continue to create synergies between the two as the market continues to grow and evolve and stakeholders continue to explore ever more innovative financing options. is expected.
