Private credit showed resilience during the pandemic. Thanks to the massive liquidity injected into the financial system in the form of fiscal and monetary stimulus, capital flowed freely and institutions in search of higher yields stepped in to provide much-needed direct lending across multiple industry sectors.
Amid growing competition for deals, many market participants missed private credit’s rapid shift from a human-centric business to a data-driven digital business. And it isn’t likely to go back.
When in-person networking, on-site visits, deal-making and due diligence went virtual starting in Spring 2020, it was hard to conceive how deals could move forward. Far from clogging up the process, after a few months it was clear that replacing travel and meetings with virtual interactions actually accelerated closings, allowing lenders and borrowers to execute on transactions from anywhere, at any time. As they looked to source new deals, many investors turned to online marketplaces in search of borrowers. The ability to find deals online, tailored to specific criteria, significantly altered perceptions. Transactions are now getting sourced, put through due diligence, structured and closed quicker and more efficiently than before.
Allocating capital quickly to companies seeking financing has wide-reaching implications for deal efficiency, speed and price transparency. Dare we say it? Private debt may not be an opaque asset class for long.
Here’s what’s changed:
What was human is now an algorithm.
For new deal flow during the pandemic, institutional investors began sourcing direct lending opportunities in online marketplaces like Finitive. These systems were able to match them with appropriate borrowers, relying on data and algorithms to find just the right deals. Investors could set extensive parameters such as investment focus, desired yield, duration and covenant requirements, and borrowers were able to input their desired cost of capital and key financial data. With all of this information in the system, borrowers and investors were able to match with one another faster and forge more meaningful partnerships based on shared goals.
Speed benefits both borrowers and lenders.
In the ‘before times,’ a borrower could wait weeks or months for term sheets. In a digital deal world, they can receive term sheets in days or minutes. Enabled by technology and data, deals are getting faster, with no friction. Closing times have moved up from two months to as quickly as two weeks. For those relying on data-driven matching, administrative and legal costs are plummeting.
Borrowers will finally get price transparency.
The $100 trillion-plus private debt market is opaque. Historically, borrowers such as online lenders specializing in, for instance, personal loans, student loans, mortgages or auto loans had no place to go to get pricing on asset-backed credit facilities. The advent of data-driven marketplaces is improving price transparency, and that trend will continue. A borrower can view and compare investors and find the best partner at the best price.
Yields will decline – lowering borrowing costs.
The lack of price transparency in private credit favors investors, allowing them to achieve excessive alpha. But when borrowers can ‘shop’ for investors in a centralized hub, they can compare what different investors are offering in terms of cost of capital and other parameters. This benefits borrowers, which will result in a drop in borrowing costs, ultimately improving both transparency and choice.
Efficiency will drive more deals.
Bringing down the cost of borrowing and transactions may give borrowers the upper hand,while reducing yields for investors, but it will also fuel growth in the private credit sector. So, while lenders will gain less yield per transaction, new efficiencies will allow them to significantly increase the amount of deals they undertake, ultimately boosting assets under management.
Some players will be disintermediated.
Investment bankers and non-tech intermediaries who charge fees to help borrowers price their deals and find investors will no longer be necessary in the new digital private credit universe. Lenders and borrowers will increasingly rely on faster, simpler and cheaper ways of transacting via centralized marketplaces where they can find each other and gain an accurate sense of pricing.
Private markets are an ever-increasing component of the economy. We currently have just half the number of public companies as we did 10 years ago. For institutional investors, providing private credit to these companies offers not only higher yields and portfolio diversification, but also insulation from volatility and reactionary fund flows.
As investor appetite for private credit grows, and more lenders and borrowers rely on digital solutions to access and evaluate opportunities, we can expect to see greater transparency, speed and deal flow – and the end of the opaque market as we know it.
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All information provided herein is for informational purposes only and should not be relied upon to make an investment decision and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision. Readers are recommended to consult with a financial adviser, attorney, accountant, and any other professional that can help you understand and assess the risks associated with any investment opportunity. Private investments are highly illiquid, speculative and are not suitable for all investors. Investments can lose their entire value. Securities on the Finitive technology platform are offered through North Capital Private Securities Corporation, member FINRA/SIPC.