Several members of DLA Piper’s Private Credit team recently attended the Debtwire Private Credit Forum, which brought together industry participants for in-depth discussions concerning the current landscape and future trends in the private credit market.
Below, we explore the key takeaways from the panel discussions.
Overview of the private credit market
The private credit market is experiencing sustained growth and transformation, evolving from traditional direct lending to encompass a wider range of asset classes and strategies. Key participants are navigating a landscape marked by increased competition, tighter spreads, and a growing need for diversification and customization. The rise of secondary transactions, special situations, and a greater emphasis on partnerships and transparency are also shaping the market’s progression.
Key private credit market themes
Sustained growth and diversification
- Private credit continues to grow despite market headwinds and heightened competition
- There is strong investor interest in diversifying across strategies, including opportunistic credit, asset-based finance, infrastructure, and real estate lending
- Europe is gaining attention for geographic and risk-adjusted return diversification
Risk pricing and market challenges
- Accurately pricing risk is challenging in an environment where higher risk coexists with tighter spreads
- Many companies are struggling to cover fixed charges and rely more on payment-in-kind usage, raising concerns about potential mispricing
The strategic imperative of scale, customization, and competition
- Achieving scale may be critical, especially for larger firms that can offer comprehensive capital solutions and leverage proprietary data
- Customization is a key differentiator, with investors seeking more targeted strategies and greater control over risk and liquidity
Evolution beyond direct lending
- New asset classes and niche strategies, such as asset-based finance and hybrid structures, are emerging
- Mezzanine financing remains relevant in specific markets, offering flexibility and strategic options for middle-market borrowers
Secondary market and special situations/opportunistic credit
- The secondary market for private credit is still developing, limited by restrictive documentation and information asymmetry
- General partner (GP)-led secondary transactions and continuation vehicles are becoming more common, especially in credit, due to longer asset durations and limited partner (LP) liquidity needs
- Special situations often involve complex scenarios requiring tailored solutions, such as refinancing, recapitalization, and liability management
- There is a strong preference for out-of-court resolutions, with existing lenders often providing the most cost-effective financing
Restructuring and market dynamics
- The shift to a higher interest rate environment is putting pressure on deals underwritten in low-rate periods, leading to increased restructuring activity
- Lenders are using creative solutions to address stress, such as amend-and-extend transactions and liability management exercises
- Private credit deals typically involve smaller lender groups and simpler capital structures, making out-of-court restructurings more feasible
Sector insights and vulnerabilities
- Sectors exposed to tariffs, government revenue, or high cyclicality are facing heightened risk
- Healthcare is a notable area of stress, with a disproportionate share of loans on non-accrual
- Roll-up strategies in sectors like heating, ventilation, and air conditioning (HVAC) have performed well, while others, such as dental clinics, have seen mixed results due to integration challenges
Investor and lender perspectives
- In a subdued mergers and acquisitions (M&A) market, focus has shifted to add-on acquisitions and capital solutions such as junior capital, preferred equity, and hybrid instruments
- Successful partnerships are built on execution, transparency, and value-add beyond capital provision
- There is a growing trend toward more collaborative restructuring deals in private credit compared to broadly syndicated loans
Conclusion
The private credit market is maturing, with participants adapting to new challenges and opportunities through diversification, scale, and innovation. As the industry continues to evolve, the importance of strong partnerships, transparency, and disciplined risk management is paramount.
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