Dear Sir, Madam, To support the FSB’s evaluation of the effects of financial regulatory reform on small and medium-sized enterprises I am pleased to provide a copy of the Alternative Credit Council’s (ACC) Financing the Economy research on the global private credit market. There are numerous data points and case studies throughout this report that demonstrate how private credit managers are supporting SMEs, and becoming more prominent sources of finance in markets such as real estate finance, trade finance or asset-backed lending. We have conducted this research on an annual basis since 2015 and previous editions of Financing the Economy can be found here. The ACC represents over 170 members that manage more than $400 billion of private credit assets. ACC members provide an important source of funding to the economy by providing finance to mid-market corporates, small and mid-sized enterprises, commercial and residential real estate developments, infrastructure, as well the trade and receivables business. The ACC’s core objectives are to provide direction on policy and regulatory matters, support wider advocacy and educational efforts, and generate industry research with the view to strengthening the sector's sustainability and wider economic and financial benefits. I would be pleased to discuss the contents of this research with you further. Kind regards, Nicholas Smith Nicholas Smith Director, Private Credit T: +44 (0)20 7822 8380 E: [email protected] This message and any attachments are confidential and intended solely for the use of the individual or entity to whom they are addressed. You must not act on or disclose the contents if received in error but should inform us at the address above and delete the message. This e-mail is not intended nor should it be taken to create any legal relations, contractual or otherwise. Our Privacy Policy can be reviewed on our website. The Alternative Investment Management Association Limited is registered in England & Wales - company no 4437037 & VAT no 577 5913 90 – and its registered office is at 167 Fleet Street, London EC4A 2EA. 1 Financing the Economy 2018 The role of private credit managers in supporting economic growth lendingforgrowth.org Financing the Economy 2018 © Alternative Credit Council 2018. This publication should not be considered as constituting legal advice or as a substitute for seeking legal counsel. It is provided as a general informational service and may be considered attorney advertising in some jurisdictions. To the extent permitted by law, neither Dechert LLP, nor any of its members, employees, agents, service providers or professional advisers assumes any liability or responsibility for, or owes any duty of care in respect of, any consequences of any person accessing any of the information pertaining to the case studies contained in this publication. For the avoidance of any doubt, the case studies included within this publication have been requested by the Alternative Credit Council (ACC), and collated and prepared by members of the ACC executive staff. The information contained in these case studies is for general informational purposes for readers of this publication only. lendingforgrowth.org Contents Foreword 4 Executive Summary 5 Manager Demographics 6 Borrowers 9 Investors in Private Credit 21 Fees 27 Fund-level Leverage and Financing 34 Fund Structures 40 Conclusion 45 Case Studies 46 3 Financing the Economy 2018 Foreword Welcome to Financing the Economy 2018, the fourth This is a significant vote of confidence in the sector and edition in a series of papers analysing the global a sign that private credit managers have established private credit industry produced by the Alternative themselves as a credible mainstream option for Credit Council (ACC), the private credit affiliate of investors, in the same way that they have established the Alternative Investment Management Association themselves as a mainstream finance option for (AIMA). This edition is again produced in partnership borrowers. with Dechert LLP. While the fundamentals driving the growth of private We are delighted to be publishing this research at credit remain strong, the factors supporting that growth a time when policymakers are re-evaluating their are facing several tests. The market remains extremely approach to the non-bank lending sector. The Financial competitive with private credit managers working Stability Board recently announced that it will no longer ever harder to compete for deal flow. This dynamic is use the term shadow banking in its work. We warmly evident in the continued pressure on deal terms, as welcome this move as the ACC, and this report in well as the growing use of leverage in some parts of the particular, have consistently argued that this term was market. Private credit managers are mindful that we are an inappropriate label for distinct, legitimate, regulated getting ever closer to the top of the credit cycle, if not and transparent business models. We hope that the economic one. this research will continue to build on the successful dialogue between our industry and policy makers. As we look ahead to 2019, we and the industry practitioners are thinking hard about the risks that may In past editions of this paper we have charted how lie ahead, not just for individual portfolios but for the private credit has grown from being a relatively niche sector as a whole. Our performance during a period of industry to a fully-fledged global source of financing for economic stress is likely to shape borrower, investor mid-market corporates in particular. The sector remains and policymaker attitudes towards private credit for on track to reach $1 trillion AUM by 2020. There are years to come. Our ability as an industry to maintain numerous data points and case studies throughout this good financial discipline and communicate not just report that demonstrate how private credit managers with our immediate stakeholders but also the general are supporting the economy in new ways, growing in public during this period will be a determining factor areas like real estate finance, trade finance or asset- in ensuring a sustainable future for the asset class. backed lending. It is also apparent that this growth is This research aims at such an honest and transparent increasingly fuelled by allocations from institutional engagement on the part of managers and members of investors, with pension funds making up the largest the ACC with the broader market and society at large. group. Jiří Król Chris Gardner Stuart Fiertz Deputy CEO, Partner, Financial Services, Chairman, Alternative Alternative Credit Council Dechert LLP Credit Council, and President, Cheyne Capital 4 lendingforgrowth.org Executive Summary Financing the whole economy: Private credit is a credit, 31% of industry committed capital comes from globally established source of mainstream finance for Europe (excluding the UK). Also, in Europe, insurers borrowers around the world. Managers are increasingly now account for twice the amount of committed capital lending to a far wider variety of borrowers outside when compared to North American counterparts. of the mid-market than ever before: from smaller businesses and startups, to larger corporations and Experience with lending: The majority of private infrastructure projects. Nearly a third of all capital credit managers that reported to this survey have invested (by the respondents to this survey) supports long-standing experience of the sector. Nearly half of non-corporate lending strategies, including asset- all respondents have been managing private credit for backed finance, trade finance, receivables, real estate over 10 years, with experience across multiple fund and distressed. vintages and loans. Borrowers can access bespoke financing that offers far Cautious optimism: Private credit managers expect greater flexibility than traditional bank lenders. One in continued growth across the asset class but are also four private credit managers surveyed provide financing preparing for the possibility of an end to the current to companies with EBITDAs of over $75 million and over credit cycle and tougher economic conditions for 40% surveyed are lending to companies with EBITDAs borrowers. Managers are preparing by lending at of less than $25 million. The tangible benefit of private higher positions within the capital structure, and by credit to the real economy can be seen through the avoiding or rotating away from cyclical sectors. multiple borrower case studies presented throughout Use of financing: More than half of all managers and this paper. investors surveyed, prefer unlevered private credit Working with borrowers: Private credit managers strategies. Where leverage is employed by managers, it are an important source of long-term finance for tends to be at relatively low levels although those levels borrowers. A wider selection of financing structures have risen slightly over the past year. as well as more competitive lending terms means Appropriate fund structures: Approximately two borrowers of private credit now have more choice thirds of all managers surveyed have closed-ended than ever when looking for financing, and thus more commitment and drawdown fund structures. With negotiating power. Borrower fees, loan coupons and these structures, the maturity of the capital committed covenants are a good measure of this, and the new to private credit strategies is matched to the finance data in this paper on all three indicates that borrowers that managers are providing to the real economy. of private credit are in a strong position. This is a two-fold benefit for the financial system; (i) Delivering for investors: The investor base of private it provides a stable source of long-term capital for credit continues to grow. Over 70% of all private credit borrowers, and (ii) it mitigates against pro-cyclical committed capital1 now comes from institutional tendencies in the credit markets and acts as a natural investors. The diversity of private credit means that stabiliser. there are also attractive strategies for smaller or non-institutional investors such as family offices, which account for 5% of committed capital allocated to private credit.