Daily Update: As Private Credit Markets Expand, So Do Risks
Today is Tuesday, December 3, 2024, and here’s your curated selection of essential intelligence on financial markets and the global economy from S&P Global. Subscribe to be notified of each new Daily Update.
If private credit offered rates of return consistent with broadly syndicated markets, it probably wouldn’t attract much investor interest. It is precisely because private credit markets offer better terms than public bond markets that investors have been flocking to them. But risk and reward are dependent variables in fixed income, and the higher rewards of private credit markets can entail higher risks that are often obscure to new investors.
S&P Global Ratings has published three articles looking at the growth and risks of private markets. The first — “Private Credit Casts A Wider Net To Encompass Asset-Based Finance And Infrastructure” — provides an overview. The second — “The Opportunity Of Asset-Based Finance Draws In Private Credit” — looks at the growth of direct lending, where businesses use an asset as collateral on a loan. The third — “Private Credit Could Bridge The Infrastructure Funding Gap” — tackles private credit and project finance.
Once upon a time, banks would take the lead on originating and placing loans from private companies. Then regulatory changes forced banks to de-risk their portfolios, leading to a decrease in direct lending from banks. Alternative asset managers have expanded into this gap in the market, providing nimble and flexible execution of direct loans in exchange for favorable terms and rates of return.
As private markets grow, more potential investors of greater size are chasing direct lending opportunities. As a result, private credit has gone in search of bigger deals with bigger returns. Asset-based finance and project finance offer these hungry markets a bigger meal. However, big projects with higher returns tend to involve unanticipated risk. Project and asset-based finance are highly illiquid and complex financial instruments and lack public markets’ transparency.
The privatization of asset-based finance carries risk and reward opportunities for private investors. There is a widening array of collateral available for lenders, ranging from intellectual property to hard assets such as factories. The expansion of private credit into this space increases the options for borrowers. But the higher returns of direct lending in asset-based finance deals come with risks. These markets are esoteric, and risks associated with their diverse collateral types may be poorly understood.
Private markets must seem like divine intervention to large infrastructure projects seeking finance. Energy projects related to the energy transition and large datacenters for AI applications require deep pockets and patient investors to realize their potential. As commercial banks take a step back from project finance, private credit markets are stepping up. S&P Global Ratings rates project finance and infrastructure transactions mostly as investment grade, but a hunger for alpha in private credit markets may introduce investors willing to take on risk profiles beyond this level.
Today is Tuesday, December 3, 2024, and here is today’s essential intelligence.
Written by Nathan Hunt.
Sustainability
October 2024 — Malaysia’s Proposed Climate Change Law, EU Deforestation Rule Delay, Canada’s Climate-Related Financial Disclosures
Regulation is shaping the sustainability agenda and changing the way companies do business in different jurisdictions, but keeping pace with constant regulatory updates has become a mammoth task for businesses and investors. In this recurring series, S&P Global Sustainable1 presents key environmental, social and governance regulatory developments and disclosure standards from around the world. This month’s update looks at Malaysia’s proposed climate change law, a delay for the EU’s deforestation-related regulation and Canada’s plan to mandate climate-related financial disclosures, among other topics.
—Read the article from S&P Global Sustainable1
Economy
Economic Outlook Emerging Markets Q1 2025: Trade Uncertainty Threatens Growth
A likely increase in trade protectionist policies among major economies will hurt GDP growth in most emerging markets over the next couple of years. However, the magnitude of the impact will depend on the details of those policies, which will become clearer in the coming months. For now, S&P Global Ratings assumes only a modest increase in tit-for-tat tariffs between the US and China in 2025 and no new tariffs for the rest of the world. In this scenario, the impact on GDP in most major emerging markets (EMs) outside of China is relatively modest. EMs in Southeast Asia are among the most vulnerable to weaker demand from China.
—Read the article from S&P Global Ratings
Capital Markets
Late-Stage Private Equity Fintech Investments Drive Fewer Deals, Higher Value
The number of global private equity-backed investments in financial technology is set to fall for the third consecutive year, continuing a decline from the private capital investment spree in fintech during 2021. The total count of private equity and venture capital-backed investments and funding rounds in fintech stood at 239 in the first 10 months of 2024, representing about 64% of deals recorded in all of 2023, according to S&P Global Market Intelligence data.
—Read the article from S&P Global Market Intelligence
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Global Trade
Trump's Tariffs Would Drive Up Metals Costs for Manufacturers
The US risks ratcheting up costs for metals-intensive manufacturing if President-elect Donald Trump pursues a proposed 25% tariff on imports from Canada and Mexico, and a 10% tariff on goods from China, industry participants and experts told S&P Global Commodity Insights. Trump floated the trade barriers Nov. 25 on Truth Social, saying the measures would stay in place until Canada and the US curb cross-border flows of illegal immigrants and fentanyl, which is a widely abused narcotic in the US.
—Read the article from S&P Global Commodity Insights
Energy & Commodities
Listen: Calm: Oil Markets Adjust to a New Normal as Risk Premium Ebbs
Oil markets have responded with complacency to sanctions on major producers, rerouting of tankers and military unrest in the major supply areas. S&P Global oil markets expert Karim Fawaz joins EnergyCents with hosts Hill Vaden and Sam Humphreys to discuss why this complacency may represent a new normal as spare capacity within OPEC+ and supply growth from outside OPEC meet moderating demand in the US and China.
—Listen and subscribe to the podcast from S&P Global Commodity Insights
Technology & Innovation
Cyber Insurance Market Outlook 2025: Cycle Management Will Be Key To Sustaining Profits
S&P Global Ratings' stable view of the global cyber insurance and reinsurance industry is supported by its solid underwriting profitability in 2023 and 2024, and S&P Global Ratings’ expectation that this will continue over 2025. The industry is still benefiting from substantial increases in rates on cyber insurance and a tightening of the terms and conditions on cyber policies, which was mainly implemented in 2021 and 2022.
—Read the article from S&P Global Ratings
Events & Webinars
Webinar: Global Credit Outlook 2025 — Americas/EMEA Session (Dec. 5, 2024)
As a key risk to the continuation of favorable credit conditions and general economic resilience, policy uncertainty is blurring the picture for 2025 — against a backdrop of coalescing geopolitical risks.
S&P Global Ratings’ Global Credit Outlook 2025 will present our macroeconomic and credit outlooks for the year ahead, including our base-case forecasts and key risks for what promises to be another perilous period for the global economy and markets.
Join our leading researchers, analysts and economists on Thursday, Dec. 5, 2024, to explore our perspective on the year ahead at our upcoming webinar.
—Register for the webinar from S&P Global Ratings
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