Private credit could follow two paths in 2025, Permira Credit has predicted.
One path is characterised by falling interest rates and a more stable economic backdrop, which should increase companies’ debt service capacity, boosting M&A activity and resulting in greater deployment. However, the other path will see ongoing global geopolitical instability acting as a block to the M&A pipeline.
Permira said that private credit managers should be prepared for both possibilities in order to perform in the medium term.
“For direct lending, falling rates are generally a positive development,” said David Hirschmann, co-head of Permira Credit and head of private credit.
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“For companies without an interest rate hedging strategy, falling rates will lower their cash interest expense. This means a higher debt service capacity that mechanically improves their credit quality.
“The impact of falling rates is also positive for deal flow, as lower rates not only increase borrowing capacity for companies, but also for businesses that are looking to make acquisitions.
“2024 was a recovery year after a weak 2023 and we expect this positive momentum to continue in 2025, supported by falling rates. So, this helps to create an environment where the volume of capital and the velocity of M&A activity both increase.”
However, Ian Jackson, Permira’s head of strategic opportunities, added that geopolitical risks could present a barrier to this growth.
“I see a lot of areas of volatility, with new risks emerging almost every week: Middle East, Ukraine-Russia, China-Taiwan, South Korea, Romania, Georgia – there are many,” he said. “And high levels of uncertainty are not good for deal flow because it makes businesses want to delay decisions. But more generally, it’s really a case of whether these geopolitical risks stay in the background or if they actually evolve into something bigger.”
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Jackson said that an escalation of geopolitical risk could lead to a pause in M&A activity, or – at worst – some sort of “repricing” activity across several asset classes.
“Being able to tap into our wide set of expertise across a range of flexible credit solutions, as well as Permira’s deep sector expertise on the PE side is particularly valuable when there is uncertainty,” said Hirschmann.
“So, for example, if the macro outlook for Europe seems less positive, we focus on anti-cyclical sectors that are less correlated with GDP growth and have their own momentum. I’d say this is why we’ve been able to consistently extract value – especially in periods of high volatility.”
Elsewhere in Permira’s Q4 2024 Credit Market Update, the firm predicted that the likely introduction of Trump tariffs should have “a relatively small impact on the Eurozone as a whole”. In fact, the firm expects European economic activity to pick up thanks to an increase in public spending, and a mild recovery in consumer spending.
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