Welcome to Financing the Economy 2018, the fourth edition in a series of papers analysing the global private credit industry produced by the Alternative Credit Council (ACC), the private credit affiliate of the Alternative Investment Management Association (AIMA). This edition is again produced in partnership with Dechert LLP. We are delighted to be publishing this research at a time when policymakers are re-evaluating their approach to the non-bank lending sector. The Financial Stability Board recently announced that it will no longer use the term shadow banking in its work. We warmly welcome this move as the ACC, and this report in particular, have consistently argued that this term was an inappropriate label for distinct, legitimate, regulated and transparent business models. We hope that this research will continue to build on the successful dialogue between our industry and policy makers. In past editions of this paper we have charted how private credit has grown from being a relatively niche industry to a fully-fledged global source of financing for mid-market corporates in particular. The sector remains on track to reach $1 trillion AUM by 2020.

There are numerous data points and case studies throughout this report that demonstrate how private credit managers are supporting the economy in new ways, growing in areas like real estate finance, trade finance or assetbacked lending. It is also apparent that this growth is increasingly fuelled by allocations from institutional investors, with pension funds making up the largest group. This is a significant vote of confidence in the sector and a sign that private credit managers have established themselves as a credible mainstream option for investors, in the same way that they have established themselves as a mainstream finance option for borrowers. While the fundamentals driving the growth of private credit remain strong, the factors supporting that growth are facing several tests. The market remains extremely competitive with private credit managers working ever harder to compete for deal flow.

This dynamic is evident in the continued pressure on deal terms, as well as the growing use of leverage in some parts of the market. Private credit managers are mindful that we are getting ever closer to the top of the credit cycle, if not the economic one. As we look ahead to 2019, we and the industry practitioners are thinking hard about the risks that may lie ahead, not just for individual portfolios but for the sector as a whole. Our performance during a period of economic stress is likely to shape borrower, investor and policymaker attitudes towards private credit for years to come. Our ability as an industry to maintain good financial discipline and communicate not just with our immediate stakeholders but also the general public during this period will be a determining factor in ensuring a sustainable future for the asset class. This research aims at such an honest and transparent engagement on the part of managers and members of the ACC with the broader market and society at large.

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  Jiří Król

  Deputy CEO, Global Head of Government Affairs, AIMA

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  Chris Gardner

  Partner, Financial Services, Dechert LLP