AXA Investment Management Alternatives’ $100bn (£80bn) private credit business spans the depth and breadth of the market. Christophe Fritsch (pictured), global head of alternative credit and a member of the AXA IM Alts management board, tells Alternative Credit Investor why it’s a great time to be a senior lender.

Alternative Credit Investor (ACI): What percentage of AXA IM Alts’ portfolio is currently invested in private credit? Do you expect this figure to rise or decline across 2025?

Christophe Fritsch (CF): By the end of the third quarter of 2024, AXA IM Alts managed more than $100bn in private debt and alternative credit. This segment represented roughly half of AXA IM Alts’ overall assets under management.

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We do expect this figure to rise in 2025. The private credit universe has expanded in response to the bank disintermediation megatrend, with investors’ appetite for the asset class remaining strong, given its attractiveness – notably the absolute and relative return and diversification benefits.

ACI: What areas of private credit are particularly attractive to you at the moment?

CF: Beyond mid-market corporate direct lending, we believe some of the most attractive areas of private credit are currently commercial real estate (CRE) debt and specialty finance strategies like significant risk transfers (SRTs).

CRE debt is attractive as it is a great time to be a senior lender at the moment. After having corrected, real estate valuations are now stabilising in Europe which creates good entry point on the debt side. Considering the banks’ retrenchment, investors can get attractive returns, both on an absolute level and a relative value basis. The illiquidity premium against traditional fixed income seems to be at its peak.

SRT remains a unique strategy in the private debt universe that gives access to very diversified portfolios in terms of asset classes, obligors, industries and geographies. These performing portfolios correspond to the core activity of major commercial banks and are traditionally not easily available to institutional investors. Investors with strong market access that have the competencies to do the credit underwriting can still source attractive deals.

ACI: What is your outlook for private credit in the year ahead?

CF: In the past, most of the growth in assets under management for private credit has been driven by mid-market corporate direct lending following banks’ retrenchment, due to regulations and tightening lending standards.

In continental Europe, the phase-in of Basel III implementation starts in 2025 for banks, although industry voices have called for further bank disintermediation to maintain the region’s competitiveness. For instance, a consultation was launched by the European commission last year with the aim to revive the European securitised markets.

Beyond regulation, SRT has become a common tool for capital management of banks that is well suited to the current environment, with M&A revivals and friendly shareholder policies.

Also, despite the potential deregulatory changes in the US following recent elections, we expect banks to continuously look to optimise their balance sheets to show velocity and improve long-term profitability.

Globally, we expect the disintermediation trend to continue and believe private credit should expand further to include a larger scope of underlying asset classes within asset-based finance.

ACI: Do you expect to see more retail money entering the private credit space this year?

CF: Yes, we do expect more retail money to enter the private credit space this year, notably coming from the private wealth segment. This segment is under-allocated to private credit, but there is a strong appetite for this asset class, supported by the rise of evergreen semi-liquid funds that target these individuals in the US – the non-traded perpetual business development companies.

Europe has also caught up with the relaunch of the EU’s European Long-Term Investment Funds (ELTIF 2.0), effective as of January 2024 and we expect to see a similar trend, although to a lesser extent.

Selecting the right asset manager is key for these vehicles given their specificities. They must have strong origination capabilities to deploy regular subscriptions fast enough to avoid a negative impact on performance, and portfolio construction must be adapted to the fund features, such as the liquidity offered to investors.

AXA IM Alts currently manages around €6bn (£5bn) of assets under management in evergreen private market strategies for wealth investors. In October 2024, we launched our first evergreen private credit fund under ELTIF 2.0 regulation. The fund is currently available to French investors and has already raised over €230m, focusing primarily on financing private mid-sized companies. This fund enables individual savers to access an asset class historically reserved for institutional investors.

ACI: Do you have any plans to launch a private credit collateralised loan obligation in Europe?

CF: Not at this stage although we closely monitor developments in the space and expect more activity. Many factors need to be considered, including the operational set-up, economics from an equity investor perspective and reaching enough diversification. You need strong origination capabilities and/or some broadly syndicated loans to reach the diversity required by the rating agencies.

ACI: To what extent is investor interest in private credit shifting?

CF: We obviously continue to see appetite for mid-market corporate direct lending, but we also see private credit investors looking to expand outside of corporates, into areas such as consumer credit given the diversification benefit combined with the stable cashflows and shorter duration.

The stabilised unemployment rate in Europe and the limited delinquencies of prime borrowers is proving supportive for the asset class and we believe private credit is definitely suited to these assets.

Selectivity and origination capabilities keep on being of critical importance. Finally, with the spreads tightening in the public markets, investors are looking for access to short-dated illiquid assets to capture the extra premium while having some natural liquidity.

ACI: How do you ensure steady origination levels?

CF: We leverage our established relationships across the entire AXA IM Alts platform and diversify our sourcing channels to maximise origination levels. We partner with banks, advisors, originators and other asset managers to source the best opportunities for our investors.

We are seen by many market participants as a trusted counterparty given our investment philosophy, combined with our transparent and consistent underwriting approach. The size and variety of our mandates allow us to be nimble to answer originators needs. For example, we can look at various asset classes and play across the capital structure. Our ability to secure follow-on opportunities with existing borrowers also plays an important role in our origination.

ACI: Do you anticipate a rise in defaults in the year ahead?

CF: For corporate loans, despite several headwinds such as inflation, geopolitical events and aggressive monetary tightening from central banks, default rates have remained moderate to date reflecting a resilient growth environment.

However, elevated financing costs have negatively affected the global economy, and we have witnessed in 2024 performance divergence both within and across sectors. For 2025, we expect defaults to slowly rise to their long-term historical averages, but I don’t foresee a material increase thanks to the expected pro-growth environment and the central banks’ easing cycle.

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From a consumer perspective, household finances are globally in good shape. The debt service ratios are at a 10-year low in most of the countries while household debt as a percentage of GDP is trending lower. Nevertheless, we also see dispersion across borrowers and regions. For 2025, we believe that the high level of savings should support future credit performance in the prime segments while the weakening trend observed in low-credit profile borrowers should stabilise, with inflation decreasing.

Overall, we anticipate the trend of idiosyncratic risk and performance dispersion across asset classes to persist. This development underscores the importance of credit selection and local market expertise to manage default risk.

ACI: Do you expect to see more consolidation in the market as demand for private credit grows?

CF: In line with the trend observed in the previous years, we do expect consolidation to continue in the private credit space. Indeed, acquisitions are often seen by asset managers as the most efficient option to build their private credit capabilities or complement their product offering. Partnerships with originators can also constitute an alternative to consolidation to increase sourcing capabilities.