Private credit to “thrive” as dry powder reaches $292bn
The private credit is likely to “thrive” this year, as a record $292bn (£232.65bn) of dry powder is being held by European-focused buyout funds.
According to the latest quarterly outlook from Permira Credit, there will be a return to mid-market lending this year, due to rising demand for financing from companies with revenues of between €20m (£17m) and €50m.
An AI-driven productivity uplift and the prospect of a recovering economy will also help to boost appetite for private credit in the year ahead.
Read more: Private debt secondary market to see higher deal flow
“Dry powder for European-focused buyout funds has hit a record $292bn as of April 2024,” said the Permira Credit market update.
“This capital needs to be spent, suggesting that there is a significant amount of M&A activity ready to take place in the right conditions.
“With inflation decelerating towards central bank targets and interest rates cuts on the horizon, the significant backlog of assets that has piled up across investor’s portfolios should hit the market in the months ahead.
“Indeed, as the ‘higher for longer’ monetary policy backdrop normalises, there is growing pressure on sponsors to monetise their portfolios, whether it be via sales or dividend recaps, and deploy their growing arsenal of dry powder.”
However, the market update also noted that despite a tentative return to economic normality, “we’re not out of the woods yet”.
Read more: Fitch: Competition in private debt is intensifying
“The euro-zone economy will remain close to recession until the second half of the year and the subsequent recovery is likely to be weak,” the report read.
“Yet, while economic conditions this year will remain challenging, there is significantly more certainty today than there was a year ago.”
Permira said that it is seeing “a significant increase in new direct lending commitments in H1 2024 to date compared with the first half of 2023,” suggesting that market conditions are improving.
“If the story of 2023 was one of direct lending groups moving up the size spectrum to finance larger companies, we believe that 2024 will see a return to the mid-market as activity starts to normalise at all size levels,” the report said.
“A note of caution though – despite a more benign outlook overall, competition remains intense for high quality assets – those with double digit growth, high levels of recurring revenue, high margins and dominant market positions.
“In light of this, strong sponsor relationships, speed of execution and transaction flexibility remain key to successful deployment.”
Read more: Emerging ‘bifurcation’ of quality in middle market private credit