Private credit: the port in the geopolitical storm

Energy prices, trade routes, commodity pricing, risk appetite and more are changing daily, creating challenges for capital markets and asset management. In a volatile geopolitical environment, any form of certainty is welcome. Increasingly, that is coming from the flow of private capital and its associated appetite for investment. The conditions are stormy, and for many, private credit is the safe harbour.
 

Private credit has filled the gap for a while

Private credit is not a newly reliable source of funding for global finance; its influence has been increasing steadily for several years. Ocorian modelling of Preqin data forecasts that private markets will grow from $14.92tn in 2025 to $23.9tn by 2030.

One of the reasons for the prominence of private credit is the headwinds that have beset institutional lending and capital raising. Banks have retreated from lending; institutions are more risk-averse and are increasingly constrained by regulation when it comes to deploying capital.

Capital markets’ appetite for funding has not diminished; in fact, it’s enhanced in times of strife and, for the savvy operator, opportunity. With capital still needed, private credit has stepped up and filled the gap.
 

Why is private credit still involved?

A funding gap alone is not enough reason for private credit to flood in and make up the difference; the opportunity still needs to be right for investment.

Some private lenders are legendary for taking opportunities at times like this, acquiring assets and exposures to assets at a moment of downturn, with a view to making good on the investment further down the line when things have returned to normal. That takes agility and bravery, which characterise private credit far more than institutional lenders.

To take one example, the situation in the Strait of Hormuz has led adjacent countries that rely on the waterway for energy resources to reconsider their reliance on oil, to avoid being caught out by a situation like this again. As a result, an opportunity has emerged for targeted investment in alternative energy sources at a time when anxiety is heightened. The smart private lender will be aware of this and will be working on it as you read this.

The nature of geopolitics and the volatility surrounding it, especially with the current changeable situation, is short-term. There will always be market shocks, often caused by political pronouncements, but if investors and lenders are in it for the long haul, these will be blips in a long history, not seismic disturbances.

Private capital inherently has a longer-term horizon, is more flexible in capital deployment and is less likely to react to the morning headlines.
 

Are times getting tougher for private credit?

Private credit has proved a safe harbour, but it shouldn’t be taken for granted. One of the large private lenders recently said that ‘the age of cheap credit is over’, which resonates with our experience and everything that’s happened in recent years and months.

The industry is also subject to heightened scrutiny, especially after the high-profile collapse of a UK-based private capital firm. This has led to a degree of uncertainty in the space and has contributed to the broader drive towards increased transparency and oversight of private credit.

We don’t anticipate demands on private credit reaching the same levels as they are for public markets, as that is a key point of difference between the two, but there is nonetheless a move to help investors feel safe and secure in what they’re investing in.

Investors are under constant pressure to match liquidity to assets; investors want increased transparency alongside flexibility and markets want access to capital that can be deployed rapidly and offers flexibility. Marry all that to a geopolitical situation that changes by the minute, and you have a stormy environment that requires pragmatic navigation.

Private credit’s role in sustaining capital formation when public pricing is volatile and institutional lending is receding is undeniable, and, at the moment, it’s the safe harbour for anyone aiming for calmer conditions.