Credit Investors Taking the Reins | Middle East and Africa Summit 2024

Global Market Dynamics and Regional Opportunities

• Asia contributes approximately 60% of global GDP growth, creating a large-scale opportunity for private credit expansion over the next five to ten years.
• Asian businesses have evolved to manage EBITDA ranges of $50 million to $100 million, moving beyond the $5–$10 million threshold seen in previous years.
• Asian markets offer "alpha" rather than "beta" due to high-quality businesses and limited access to traditional credit markets compared to the West.
• Geopolitical supply chain disruptions and the "China plus one" strategy are driving infrastructure development and capital formation across Asian regions.
• The U.S. private credit market is considered the most mature globally, with 80–90% of the market evolving from alpha to beta due to high efficiency and competition.
• U.S. lending rates for well-capitalized companies have compressed significantly, dropping from SOFR +650 basis points to a range of 350–400 basis points as the CLO market recovered.
• In the U.S., the top private credit managers are capturing 80% of fundraising capital, creating an "arms race for scale" that marginalizes smaller players.
• Commercial loan recovery rates in the upper U.S. market (BSL) have fallen to approximately 38%, contrasting with historical lows of 65–68%, signaling market stress.
• Europe's private credit market lags behind the U.S. in maturity but benefits from a slower reaction to capital inflows, preserving slightly higher returns.
• European origination efforts have shifted geographically over the last five years: from the UK (70% share), to France, and currently to Germany, Benelux, Italy, and Spain.

Strategic Shifts and Financing Solutions

• Private credit is increasingly filling the gap for SMEs and large infrastructure projects where traditional banks cannot lend, such as Saudi Arabia's Vision 2030.
• Zia Uddin's firm manages $20 billion with 280 employees, emphasizing a labor-intensive, grassroots origination model to access the sub-$35 million EBITDA middle market.
• Innovative financing strategies include venture debt, software lending based on recurring revenue multiples, asset-based lending (equipment, receivables, inventory), and specialized life sciences financing.
• Private credit lenders are addressing "criticized assets" on bank balance sheets (approx. $500–$580 billion in the U.S.) by financing their high-quality receivables while banks retain cash management relationships.
• European firms like Bearings emphasize "permanency of capital" (e.g., insurance-backed capital) to provide continuity for sponsors needing repeat financing for add-on acquisitions.
• The industry is shifting from transactional "trades" to long-term relationship building, with some firms like LM Credit Partners maintaining a presence in Asia for over 20 years.
• Retailization via non-traded BDCs has pushed average portfolio EBITDA from $100 million to $330 million in four to five years, effectively moving capital into the syndicated loan market.
• BDCs are mandated to use a "co-investment strategy" under the Investment Company Act of 1940, meaning retail and institutional funds often hold identical loans, potentially lowering returns for both due to reduced complexity premiums.
• The "retailization" of credit is characterized by 6% penetration in alternative investments, with retail investors paying higher fees due to lower economies of scale and lack of sophistication.

Regulatory Frameworks and Systemic Risks

• European regulators, including the Bank of England, are increasing engagement with private credit managers regarding valuation policies and systemic risk data collection.
• Panelists emphasize that a functional legal framework and "rule of law" are prerequisites for private credit, as lenders must have the ability to enforce collateral rights and foreclose.
• In Asia, private credit growth is being facilitated by close collaboration with regulators to develop enforcement mechanisms, such as India's bankruptcy code, over the last decade.
• Michael Gross warns that the largest risk is contagion: if retail investors face early defaults, liquidity redemptions could force fire sales, even if the underlying assets are not levered systemically.
• Unlike the 2008 financial crisis, current private credit funds generally maintain low leverage (1:1 or less) and banks have not lost capital on private credit loans.
• Panelists argue that the "golden age" of double-digit returns with zero losses is unsustainable, and market corrections are already visible in the upper-middle market.
• To mitigate risk, firms are prioritizing "workout capabilities," focusing on the ability to recover capital from distressed deals rather than just originating new ones.
• Diversification is identified as a critical defense against concentration risk, particularly avoiding the copy-paste strategies of early commingled funds that failed in Europe.
• The industry is moving toward more complex, multi-strategy product structures to allow pivoting between asset classes rather than relying on single-asset BDCs.

Forward-Looking Statements and Future Outlook

• Asia is expected to see "sensible, stable growth" in the next few years as the market matures from a distressed-focused era to a performing credit model.
• The U.S. market is projected to see a convergence of returns for large private credit players toward syndicated loan market returns due to scale and retail capital pressures.
• Middle East policymakers are advised to encourage local private equity investment and foster local bank lending to private credit providers to lower the cost of capital.
• Securitization technologies like CLOs and CBOs are viewed as the primary vehicles for institutionalizing private credit and attracting insurance capital in the region.
• The industry anticipates a continued need for education in retail channels, as advisors and investors currently have low understanding of private credit risks and structures.
• Long-term success is defined by the ability to generate equity-like returns on credit instruments through rigorous fundamental analysis rather than relying on illiquidity discounts.
• Banks are unlikely to return to significant cash-flow lending segments due to post-GFC structural changes and a lack of risk appetite, solidifying the non-bank lender role.