International Private Credit: A Differentiated Source of High Income

Supply-Demand Imbalance - Robust International Private Credit Market Has Developed

In the years following the financial crisis, global investors have been penalized with low bond yields and limited opportunities to generate higher income. Over this same period, a steady stream of banking regulations has considerably reduced the capital that traditional lenders can deploy to deserving borrowers. While lending constraints have somewhat alleviated in the U.S., conditions remain particularly challenging across European and Asian markets. As a result of this supply-demand imbalance, a robust international private credit market has developed. This credit market is supported by specialty lending businesses with local market knowledge and relationships as well as sophisticated sourcing, underwriting, and asset management capabilities.

These private lenders provide productive capital when traditional lenders cannot participate and thus are compensated with potentially higher returns on their investments when compared with public markets debt.

We interviewed BlueArc Capital, a specialty alternative investment firm, to discuss their findings on the international private credit markets, the key benefits offered to investors in this market, and how investors can access this opportunity set via established and experienced private lending teams.

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What is International Private Credit?

Broadly speaking and similar to the U.S., international private credit provides a source of capital to corporations, financial sponsors, and small enterprises with restricted or underserved access to traditional lending sources. Private credit can take a variety of formats but is often characterized by highly negotiated lender protections, structured cash flows, and higher income potential when compared with the publicly listed and broadly syndicated loan markets. A few examples of different types of private lending are as follows:

Investors Demanding Higher Yields

Even 10 years beyond the financial crisis, investors remain yield-starved due to artificially suppressed interest rates. Global government bond yields remain paltry, and often negative, as of early February 2019 (Figure 1). International private credit may provide relief to income constrained portfolios.

Key Benefits and Return Potential of International Private Credit

• Strong potential for higher income than available in traditional public debt markets
• A low correlation to public markets
• A limited duration profile
• Transparent risks
• Accessible collateral often secured by cash flows

From a total return perspective, international private credit offers the potential to capture high single-digit to low double-digit net returns largely from senior, secured debt risk with moderate use of leverage.

Why Consider International vs. U.S.?

Coupled with a reduction in traditional bank lending, the private credit market has grown since the financial crisis and continues to provide a robust opportunity set for investors due to its income potential, strong lender protections, and low correlation to traditional markets. As compared to the U.S., however, European and Asian credit markets remain historically underserved (Figure 2) and are arguably in an earlier stage of an opportunistic investment cycle (Figure 3). These less developed and more fragmented private lending markets in Europe and Asia may provide for greater return potential and structural protections.

Figure 2: Credit Structurally Undersupplied Across Europe & Asia

Source: World Bank

Figure 3: Capital Raised for Private Credit Investments