It is time to bridge the gap between private debt asset sellers and investors

By Christoph Gugelmann, CEO, Tradeteq

Christoph Gugelmann, CEO, Tradeteq

Investor appetite for private debt has made it one of the most popular segments in the alternatives sector and, more broadly in the overall lending landscape. So far this year, the private debt sector has been held back by the difficult economic backdrop, but as growth picks up again the sector should resume its upward trajectory. The recent, more challenging, backdrop for private debt has thrown a spotlight on the need to improve how asset sellers and investors connect. And a solution is at hand: the automated securitisation of deals through private debt digital marketplaces

A more challenging environment

The global private debt market has grown every year since 2000. Between 2010 and 2022 private debt assets rose 460% to more than US$1.4 trillion, according to data provider Preqin. In more established markets, private debt is often used to finance buyouts and acquisitions. It is typically not issued or traded in an open market, with the borrowers usually being unlisted companies.

However, this year in Europe, the trajectory has not been quite so smooth, in part because banks have cut loan creation, due to a drop in business activity and there is a funding squeeze in non-bank lending, which has led to a shortage in the supply of quality debt.

During first eight months, funds raised in Europe’s private debt sector reached 26.1 billion euros, down 34% from the same period in 2022, Preqin data shows. Reinforcing the point, Deloitte research shows that direct lenders closed just 111 transactions in the second quarter of 2023, down 48% from a year earlier.

Private debt growth set to resume

This decline in fundraising and generally more cautious deployment of capital is largely a response to the economic downturn. Alternative lenders still have plenty of cash but are more selective, and creative, about using it.

For instance, corporate re-financings, made up 15% of total private debts deals in the year to September, up from 12% in 2019. Pitchbook data also shows that deals, which are neither mergers nor refinancings now account for 34% of total dealflow, compared to 23% in 2019.

So normal service is expected to resume in the final quarter of 2023 and through 2024 with steady growth returning to the market in Europe. The alternative assets sector is expected to grow 7% CAGR over the next five years, driven largely by investment in private debt, which is expected to see global revenues rise by 9% annually through 2028.

What would accelerate this recovery is addressing the relative lack of transparency and inefficiency in deal sourcing that are characteristics of the sector. The market requires an injection of liquidity, which can be achieved by transforming private debt assets into easily tradeable securities, a financial instrument with which investors are familiar, and allowing investors the opportunity to exit at trade. Resolving these issues would be a very positive step to improving the market’s overall attractiveness.

Streamlining processes are essential

New technologies, focused around online platforms and securitisation-as-service technology, are making this possible. For instance, Tradeteq’s platform offers an unprecedented level of transparency, granting investor a comprehensive view of the market, including all available offers from various asset originators. This transparency extends to detailed information about the transactions and the originators themselves, allowing for a more thorough evaluation. Such depth of information empowers investors to make more informed decisions, a significant leap from the previously opaque nature of trade finance markets.

Enabling live showcasing of transactions and asset originators, which Tradteq’s platform offers, significantly enhances the decision-making process for institutional investors. By providing a standardised format for presenting deals, the platform streamlines the initial phases of deal sourcing, offering a more efficient approach to identifying and assessing investment opportunities.

By repackaging irregular private debt assets into tradable securities, streamlining the process with workflow automation, following a securitisation-as-a-service model, homogeneity is brought to private debt. In the past, the irregular nature of private debt made it challenging for investors to access. Ultimately, the assets need to be tradeable. The need to be converted into recognisable instruments with a CUSIP number or an ISIN.

By providing a primary issuance marketplace with an interactive space, Tradeteq’s securitisation-as-a-service facilitates exposure and engagement between sellers and investors. As well, it offers detailed due diligence resources designed to meet the necessary criteria of institutional investors – the goal being to maximise the chances of securing a favourable decision from investment committees.

Also important are sophisticated tools for analysing transactions. Tradeteq’a tools define eligibility criteria and investment mandates, ensuring that each transaction aligns with the specific needs of investors. This aspect is particularly vital for asset managers who require compliance with regulatory standards and performance metrics, and who require the ability to assess each transaction against predefined criteria and mandates.

In addition, Tradeteq’s service includes reporting tools, which produce automated reports tailored to the diverse needs of investors, ranging from regulatory compliance to detailed performance metrics. For asset sellers, this means real-time feedback on instrument eligibility and the capacity to manage large volumes of instruments efficiently.

More measured growth

A recent report by research firm Cerulli Associates showcases the enduring appeal of private debt. It now extends beyond traditional corporate borrowers into emerging sectors such as infrastructure, real estate, fintech and life sciences.

The sector’s growth in Europe is likely to be more measured and more sustainable too. Under draft legislation recently agreed by EU member states and European parliament negotiators, private debt funds will face more limits on the amount of borrowed money they can invest.

Open-ended credit funds — which are more liquid than traditional private credit funds and increasingly aimed at retail investors — will also be subject to new measures yet to be agreed.

As with any young market, private debt is maturing, becoming more regulated and sustainable, which is good for the institutions that commit the capital, the private debt funds that deploy it and the corporates who borrow the money, which is ultimately a benefit for us all as it should help stimulate economic recovery.

1 https://www.reuters.com/breakingviews/private-credit-partygoers-reach-hard-stuff-2023-10-11/
2 https://www.reuters.com/business/finance/european-private-loan-market-falters-corporate-credit-stress-mounts-2023-
09-07/
3 https://www.reuters.com/business/finance/european-private-loan-market-falters-corporate-credit-stress-mounts-2023-
09-07/
4 https://web-assets.bcg.com/c8/97/bc0329a046f89c7faeef9ab6a877/bcg-global-asset-management-2023-may-2023.pdf