The emergence of large-scale continuation funds in the private credit space looks set to catalyse further growth in the market, as well as advance the expansion of the retail sector.
Reflecting on the recent news that BlackRock is to launch a $1.3bn (£1bn) private credit continuation fund, Milko Pavlov (pictured), managing director of Houlihan Lokey’s financial and valuation advisory group, said the move by the mega manager will open opportunities for similar transactions in future.
“In private equity 12 to 15 years ago, continuation vehicles were only used for the so-called ‘zombie funds’, but once the established players started to adopt them in order to provide liquidity, it became the norm for funds to do it,” he said.
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“A transaction such as the BlackRock one implies that those holding private credit will no longer be afraid to explore these avenues. It will come down to pricing and terms. We are aware that there are secondary transactions within the funds that take place, typically depending on the performance of the manager and the quality of the team. People will be trying to understand what the pricing will be to assess if that would be something to utilise for themselves.”
Ultimately, Pavlov expects the extra liquidity, and the emergence of a strong secondary market, will create a greater dependency on private credit for exit potential and to innovate new financing structures for a variety of uses.
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This is likely to attract more retail investment, as well as highlight private credit as an ever more flexible financing option, where access to bank finance is not an option.
“Particularly in Europe, we’re going to see far more retail going into private credit,” Pavlov said. “It’s an asset class that, once people are educated, understand the risk profile, and are able to conduct diligence on the GPs, I believe will trigger significant growth.
“Keep in mind, that in a lot of European countries, you still have deposits at zero per cent whereas here we’re looking at probably six to seven per cent yield, taking into consideration distribution and default provisions. We are seeing structures that provide certain elements of liquidity, which is more important for the retail segment.”
Commenting on the rising concern among politicians and regulators that private credit may present structural risks to the economy, Pavlov said: “I do sympathise with the concern of the regulators because as they see the data coming through, they are starting to realise that private credit is playing a systematic role in the funding of the economy.”
However, he pointed out that while private credit does generally carry more risk than bank financing, the largest and most sophisticated players in the market undertake rigorous due diligence.
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“From a reporting, monitoring and underwriting standpoint, the process is fairly robust, especially with the clients we work with,” he said. “However, there could be players that are not using a reputable valuation agent, where the appetite for risk might be higher and that could trigger a lot more issues further down the line.”
The rise of these ambitious and innovative private credit funding structures is set to cement the asset class’s place in the financial system going forward. Pavlov expects growth across the board, as well as more joint ventures between banks and private credit managers, and, ultimately, more consolidation.
