From Euromoney: Private Credit Article

May 2024

Originally published by Euromoney on April 23, 2024.

The rapid expansion of the private credit market, outside the purview of banking regulators, might pose a fresh systemic risk. As smaller investors increasingly bet on an asset class touted for its high returns and minimal losses — potential challenges may loom.

Private credit outside of traditional banking has seen growth in Europe. This development introduces diversification, promising high returns adjusted for risk and exhibiting low volatility.

Richard Olson, Managing Director in Lincoln’s Valuations & Opinions Group, commented, “What many larger specialist asset managers are realising is that their core strength is credit selection and portfolio management, and that it makes sense to outsource the valuation function, which is otherwise a high internal fixed cost, and re-charge it to the fund.”

Every quarter, Lincoln International assesses the value of over 5,000 companies, mainly held by over 150 different alternative asset funds.

“Many smaller alternative asset managers are initially reluctant to outsource valuation of loans because they see their primary communication with limited partners being around valuation and so they worry about losing control of their own story on performance,” Richard added.

Lincoln recently published its European Senior Debt Index, which revealed a compound annual growth rate of 8.2% from 2019-2023. This compares to the 4.4% CAGR seen in the public Morningstar European Leveraged Loan Index. Moreover, the ESDI demonstrated significantly lower volatility, with a standard deviation of only 1.1% in direct lending, as opposed to 5% for leveraged loans.

View additional insights in the original article.