Can private debt move away from direct lending?
It is true that a big chunk of the private debt market is made up of direct lending and has been since the global financial crisis. But for UBP, there is a desire for managers to diversify away from the asset class and private equity-backed borrowers.
In a white paper, the Swiss private bank noted that fund managers are adding origination capacity to identify borrowers without sponsor backing and are turning to other sectors such as asset-based financing.
“There is further diversification to be found away from sponsor-backed direct lending and commercial real estate financing,” the authors of the report wrote. “We believe investors will be increasingly attracted to strategies other than these.”
UBP expects asset-backed finance to be a major growth area, driven by several factors, including the opportunity for alternative lenders to take market share away from banks.
It offers secured exposure to diversified pools of borrowers, which provides investors diversification. It also has attractive repayment profiles, according to UBP.
Read more: Asset-backed finance is “next frontier” of private credit
But, origination will be a key differentiator. Although several groups including Blackstone and KKR have announced their intention to boost their asset-based finance investing activities, it is easier said than done.
“It is one thing to say that private debt providers will step in to fill the space left by banks, but it is easy to overlook how banks have built their origination platforms over decades and longer,” UBP said. “Asset managers will have to develop their origination of real-economy financing opportunities, which will likely present more of a challenge than originating sponsor-backed or commercial real estate loans.”
Read more: Private debt diversifies from direct lending
Meanwhile, in real estate, moving away from commercial property, UBP sees further opportunity in residential deals. The authors see particular interest in the “new living” theme, financing residential real estate across Europe where there is an acute shortage of housing.
According to JLL, between 2018 and 2022 there was a housing undersupply of almost 1.6 million homes in Germany, France and the UK.
“This structural undersupply of housing contributes to high rental incomes and house price resilience,” UBP said. “In addition to housing, the new living sector includes student housing, senior living and care homes. These assets generate rental income which is defensive in relation to inflation and therefore particularly attractive to institutional investors.”
Read more: Mezzanine debt set to grow in 2024