As the financial impact of the COVID-19 crisis deepens and develops, the direct lending industry has been put to its first major test as it adjusts to a rapidly transformed landscape. In a webinar hosted by Intertrust Group on Wednesday 23 September, key questions were raised about the pandemic's impact on private debt growth: are direct lenders set to play a key role in the recovery of economies in the aftermath of the global pandemic? Will the pandemic push regulators to increase the regulatory framework? And how will GPs and LPs adapt their operating models to take full advantage of this asset class?

A poll conducted during the webinar revealed that over one third (39%) of the audience expect to see increased allocations to private debt, followed by distressed assets (according to 32%).  Michiel Boorsma, Partner at Beechbrook Capital, echoed this sentiment and said he expects to see continued growth in the private debt sector: "Over the past 10 years, we've seen a very strong drive towards private debt in the market. With banks focused on existing portfolios and government bailout schemes, I expect COVID-19 will only accelerate this trend going forward." 

Adriana Oller, Partner and Founder at Resilience Partners, added: "We are actually seeing an increase in the demand and quality of the deal flow in the aftermath of the pandemic - especially for outstanding companies in the small mid-market, which are not targets of rescue COVID-19 financing schemes and instead require tailored long-term solutions."

Growing opportunities

This aligns with findings from Intertrust's recent Global Private Equity Outlook 2020 report. The study revealed a growing interest in the role that private debt can play during and after the crisis, with private debt emerging as the biggest area of diversification. It also highlighted that large direct lending firms with distressed situation capabilities will be well placed to capitalise, with record levels of dry powder likely to act as a catalyst.

Commenting on this expected rise in the volume of distressed fund transaction activity, Jeff Griffiths, Co-Head of Private Credit at Campbell Lutyens, said: "We expect to see an increase in default rates of high-yield bonds  and growing distressed debt opportunities concentrated in the mid- and lower-mid-market across key industries." 

On the possibility of increased regulation in private debt, Benjamin Lamping, Director at Nuveen, said: "As larger firms that are raising significant funds become more systemically important as primary lenders, we certainly can't rule out the possibility of regulators coming in, insisting on creating a framework for stability in the system. But we are already seeing that stability in the service that private debt managers are offering borrowers, who are deriving great benefits from it." 

Mr Lamping believes that regulators would firstly need to acknowledge the importance of private debt as a support for the middle market and consider the risks that increasing regulation could pose, by presenting impediments to the expansion of private debt as an important utility for borrowers.

Tech-enabled transparency

But this is where technology and data-driven processes may come to the fore. When asked about navigating the challenges of remote investor due diligence, 67% of the audience agreed that this has become easier with the use of virtual due diligence and data rooms. 

Campbell Lutyens' Mr Griffiths added: "In private credit, compared to other asset classes, the level of transparency that investors get is definitely superior to anything you would get with a manager on a broadly syndicated loan portfolio. Investors are asking for even more disclosure and transparency, as their understanding of these markets continues to improve over time."

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