More funds and private investors in the future of credit

More private and institutional capital will shape the world of credit in the coming years. The latest Mercer study, Marsh McLennan's business, Private Markets in Motion - Private Debt, paints a picture that shows how private debt funds, which have already exceeded USD 2 trillion globally, will be called upon to cover part of the 90 trillion financing needs over the next ten years. A scenario in which funds are growing, institutional investors are increasing and new, more flexible solutions such as semi-liquid and evergreen vehicles are spreading. The research, conducted on 57 international asset managers with more than $2 trillion under management, shows how private debt is, in fact, consolidating as a structural component of the financial markets, aided on the one hand by the reduction in loans provided by the banking system and, on the other, by a need to ease debt levels for traditional channels.

80% of managers, the report notes, expect an increase in the number of private debt funds over the next 3-5 years, with 77% of managers surveyed planning to launch a new strategy as early as the next 12 months. 87% expect growth in institutional investors and, according to 75% of respondents, large capital available to wealth management will be the driving force, followed by insurance (20%), pension funds (3%) and foundations (2%). A scenario in which the modalities are also changing: semi-liquid, more flexible funds are gaining ground. An evolution that "entails, on the one hand, an increase in competition, particularly felt by larger operators, and, on the other, a broadening of investment opportunities, which now include not only traditional loans but also asset-based debt and specialty finance", explains Luca De Biasi, Partner, Wealth Leader of Mercer Italia and CEO of Mercer Italia SIM.

With the arrival of more funds and investors in the credit sector, the most promising segment remains the mid-market (for 53% of the respondents), but over a five-year horizon, managers are mainly focusing on asset-based finance (65%), infrastructure (35%) and renewable energy (30%). Next to opportunities, competition is the challenge that 37% of managers expect as the main critical issue, especially for larger operators, while smaller ones point to constraints related to institutional investors' liquidity.

Credit risk could increase: more than half of the managers (56%) expect loss rates to rise by 10-50 basis points over the next two years, a further 9% by more than 50 basis points. In addition, 12% of managers with less than USD 40bn under management expect a significant increase in loss rates, compared to only 7% of the largest managers. In parallel, 53% also expect a reduction in fees, a sign of a more competitive and mature market.

A scenario in which Italy is no exception. The country 'is characterised by a historical propensity of institutional investors towards fixed income, and private debt is no exception,' says De Biasi. 'In recent years, this asset class has found increasing representation in the portfolios of domestic operators.