Financing the Economy 2025 Research Launch

Thank you and good afternoon everybody. As Jack said, we have been conducting research in private credit for the last 11 years and this is um the highlight of a paper that we just released this morning. Um I urge you to go to our website and download the entire paper because uh there's much more detail uh available there uh that that we've published. One of the first things that people ask about the private credit market is what is it and how big is it? Um we attempt to do that uh or answer that in our paper.

Um and we define private credit as that which is directly originated by the investor community. So primarily asset managers but also pension funds and insurers and therefore exclude the broadly syndicated loan market. Um from that perspective if I could get the slides back on that would be great. Um and uh how we come to the 3.5 trillion number?

Well, two trillion of of assets are managed by those who responded to our survey this year. And then the rest we estimate from um either having direct conversations with those who have not responded to our survey who are our members or we use various databases to cross reference uh for the rest. And so we believe this is a fairly accurate number of the overall size of the private credit market as we define it. Um and that includes dry powder. So committed capital versus um the actual deployed capital.

And why some of our numbers um differ from what you might see in other databases is that we include not just corporate lending and some of those databases focus on corporate lending only uh but also any other areas of lending where asset managers are active. So real estate um assetback financing and infrastructure being the other three vertical that today make up 40% of the global aum. So this is not an insignificant uh portion of the market that has for a very long time been synonymous with corporate lending. In terms of geography, the US is still very dominant. So so it's about 65% by by aum um uh but Europe has grown very rapidly and is catching up and whilst Asia is still uh tiny in the overall scheme of things, it's catching up even further.

So the dynamic is that the sort of the history weighs heavily on the current stock. But when you look at the deployment numbers and we don't have them break broken down in in in this presentation but you can see that in the report Europe and other parts of the world are actually deploying more and faster than what you see in the US and this is the global deployment number. what you see is a big jump in deployment and in 2024 which was primarily driven by a wave of refinancings. Um we had a a big year in 2021. 2021 was the sort of the bumper year both in terms of funding but also in terms of asset raising.

Uh and a lot of these loans were financed at a time where spreads were high. The rates were not high yet. The rates went up in 2223 uh which resulted in a lot of pressure on on th those borrowers. Uh but the non- cold periods for these loans have not expired. They started to expire in 20 N23 24 and this is what led in a reduced spread environment now and where rates have started to come down to a huge demand for refinancing by the industry and that's why you see this jump.

So this is gross deployment volume, not the net new money that got into the economy. That's that's much smaller and that's estimated to to have grown maybe by by uh a third or so. Um the investor composition of private credit has been subject of a lot of discussion and um again we're lucky to have a sort of a a 10year window or 11-year window on how that's evolved and there's a few things who are uh stable which is a large component of investors are pension funds and insurers. um among the larger managers, insurance uh is even a larger component of of the uh capital that they uh deploy. But if you look at the wealth and direct retail channel, that's the channel that's really grown the most, relatively speaking, more than doubling over the over the decade and now making up roughly a quarter of the overall investor base, which brings with it a whole host of issues around investor protection, but also crucially product design because retail and instit and and sort of wealth investors tend to be uh demanding of liquidity.

And what's been driving the interest on the investor side? Well, performance is the simple answer. And in the middle, you can see that that private credit uh has had a fairly consistent performance uh median IRRa at around 9% but with very low dispersion. So while you you face potential upside a bigger upside in some of the equity strategies you also face a downside that is not uh the same in private credit. What's also been interesting in terms of comparing the private markets and and looking at private credit versus other verticals is the level of return of capital to investors.

What you see in the light blue line is the proportion of capital uh return to investors uh over time in the private equity space and up in the dark blue is the private credit space. So the private credit has been cons more consistent in deploying capital for obvious reasons loans mature uh it's not taking place in the same manner in private equity which has a lot of implication obviously for investors but also again for regulators. people worry about private credit and financial stability as Jack said. Uh and so one of the numbers we track is is fund level leverage. Um this year this is aggregate data.

We've gotten much more granular and again you can see that in the report but broadly speaking private credit funds are not levered more than onetoone and roughly a third of private credit funds do not use any leverage at all. So we don't and that's again been a consistent steady picture across uh the time that that we've been tracking the market. What about liquidity mismatches? Again this is the sort of a distribution of population of of uh funds that offer uh some level of liquidity to investors. Uh numbers could be confusing but the punch line is most funds are locked up.

They cannot you know investors cannot demand capital. They cannot run on funds. They cannot destabilize the funds by demanding their money back. They have to wait till the fund mature. Um and of course uh we talked about cockroaches and you know shenanigans in in the private credit world.

Well, what are the nonacrruals? So what does non um non-performing loan universe looks like? And at the moment it runs at around uh 2% close to 2% which for the type of credit and most of it is still subinvestment grade. We have a growth in the investment grade universe uh driven by some of our members but it's still very much in line with what you would expect for similarly rated credit elsewhere and so not much to worry about again unless things change dramatically. What is also seen in the data is that that stress in the portfolios that has come from higher rates has stabilized and now is actually improving again as rates and spreads are both decreasing.

And here is a simple scenario modeling of what you know a shock could look like in private credit. And again, the punch line here is you would have to have triple the non-performing rates that we see in the data today and a dramatic fall in recovery rates for you to even start losing money. That's the sort of the 0% orange uh orange space. So again, we we don't see that coming uh anytime soon or the data is not um showing us that that's going to be uh uh expected. So to conclude, we believe the growth um is driven by structural factors, not cyclical ones, and is um is healthy, significant, but also sustainable.

Um all the financial stability metrics seem to be pointing that way. Um returns might suffer unless we see sort of broadening of of spreads again uh in in the coming uh uh years and then return of the M&A market which is financed by private credit. Um, and we don't expect any kind of endogenous shocks coming from the private credit space that could sort of endanger the financial system. Um, hopefully the the rest of the conversation will will shed even more light on all of the points that I mentioned. And again, I urge you to go to our website and download the report.

Thank you for your attention.