White Papers

Private Debt To Evolve And Grow – UBP

Amanda Cheesley Deputy Editor 10 April 2024

Private Debt To Evolve And Grow – UBP

Swiss private bank Union Bancaire Privée has just released a white paper entitled “Private Debt: A Resilient and Diversified Market” looking into the resilience of the private debt sector. 

The contraction in bank lending over the last few years has turned large and especially smaller borrowers to the private debt markets, according to Union Bancaire Privée.

This change in the supply of bank credit has significantly increased the demand for private debt and UBP's private debt team expects this trend to continue.

Geneva-headquartered UBP thinks that investing in the global real economy will spur the growth of private debt for years to come. Within real estate, it’s time to look beyond commercial mortgages. UBP sees opportunity in the “new living” theme that is financing the places where people live. Across Europe and beyond, there is an acute shortage of mass market housing, student housing, critical worker housing, senior living and care homes.

The market for private credit has surged in recent years. According to EY, in a January 2024 reported entitled Private Debt – An Expected But Uncertain “Golden Moment?, the private credit space has surged from $280 million of assets under management to $1.5 trillion in 2022. The expansion in the market has also started to prompt central banks and international bodies to issue warnings. As reported separately today, the International Monetary Fund has warned of potential systemic risks that private credit might cause.

The narrative
UBP highlighted how direct lending has dominated the private debt narrative since the global financial crisis. A huge amount of capital was deployed to private equity managers for transaction financing, leading to origination of borrowers by private equity firms. Fund managers are increasingly seeking to diversify away from these types of sponsor-backed loans and turning to other sectors such as asset-backed financing, the bank added.

UBP believes that there will be a growth in asset-backed financing (ABF) within private debt. ABF refers to financing secured by physical or financial assets. Physical assets may include capital equipment, machinery, and property. Financial assets may include receivables, student loans, credit cards and intellectual property. ABF will encompass transition infrastructure and capex, including solar energy generation and battery storage, for example.

This growth will be driven by multiple factors, according to UBP, including an outgrowth of the banking system, exposure to a diversified pool of borrowers and attractive repayment profiles. Asset-backed financing is secured by physical or financial assets and therefore potentially provides a better risk profile.

UBP thinks that attractive risk–return will be found in residential real estate and asset-backed financing, two sectors which offer the combination of returns, diversification and resilience.

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