Assessing the risks associated with private debt market

Private debt has become an increasingly popular avenue for credit investors seeking higher yields and for borrowers looking for closer relationships with lenders. However, the lack of available data and the distribution of debt across various lending platforms have raised concerns about the level of risk in this market. Patrick Drury Byrne, Head of Credit Market Research at S&P, shed light on these issues in a recent interview with CNBC Africa. Drury Byrne highlighted the distinctions between private debt markets and traditional syndicated markets, emphasizing that private debt transactions typically involve a smaller number of participants and are often executed bilaterally. One of the key features of the private debt market is the provision of credit to privately owned companies, with a focus on direct lending. The private debt market has experienced significant growth since the global financial crisis, as non-bank lenders have filled the void left by retreating banks. This market has attracted a diverse range of participants, including private debt funds and insurance companies, seeking higher returns in a low-yield environment. One of the primary concerns surrounding the private debt market is the lower credit quality of borrowers, with many companies rated B- or below. Despite this, the market demonstrated resilience during the COVID-19 pandemic, with lower payment defaults compared to the wider leverage loan market. Drury Byrne attributed this resilience to the bilateral nature of private debt transactions, which allows for quicker resolutions and lower restructuring costs during times of stress. However, he cautioned that the market's rapid growth poses challenges in assessing overall risk and identifying key players, which could potentially lead to contagion effects in broader credit markets. In terms of Africa's potential in the private debt market, Drury Byrne highlighted the demand from small and medium-sized enterprises for credit. While the market has seen robust growth globally, factors such as transparency and liquidity pose challenges for investors. The appeal of the market lies in its relative value proposition compared to other asset classes, as well as the buy-to-hold investment approach that characterizes private debt. Key players in the private debt market include asset managers, alternative asset managers, and insurance companies, who have increasingly become active participants in driving market growth. Collaboration between asset managers and insurers has emerged as a strategy to mitigate illiquidity risks associated with private debt investments. As the private debt market continues to evolve, monitoring the interplay between risk factors, returns, and market dynamics will be crucial for investors navigating this complex and increasingly important asset class.