Junior debt set for resurgence
AS SENIOR lenders become more cautious, there is an opportunity for junior capital to fill in the gaps in the market, according to Churchill Asset Management’s Jason Strife.
Many started 2025 thinking that there would be a rebound in activity and private equity firms would be able to exit some of their holdings, but this has not materialised yet.
“Today’s elevated levels of uncertainty make it difficult to sell anything other than what we would define as a very ‘high quality’ asset,” said Strife, who is head of junior capital & private equity solutions at Churchill.
“So, you have this huge portfolio of private equity companies that in many instances are five to seven years old, and in many cases the private equity firms are still aligned with their lenders and their investors, in that they want to generate a return, but it’s taking longer.” Combine that with a more cautious senior
lending environment, upcoming maturities and a lending fatigue, it is a period where junior capital can really shine, in his view.
He’s not the only one highlighting the opportunity in junior capital. Earlier this year, Bloomberg reported that HPS was seeking over $10bn (£7.5bn) for a junior debt fund, which would be among the largest so far in private credit this year.
But although Strife believes junior capital solutions can offer interesting opportunities to investors, 2024 saw a flight to safety, with a sharp rise in direct lending fundraising, versus a “dearth of interest” in junior capital, according to PitchBook.
Still, Strife added that in many instances portfolio companies lost one to three years due to the impact of Covid, which the market has
not really appreciated.
“We're in a period where I think private equity firms should really be exploring what the art of the possible is with their capital structure, ultimately creating better prospects for the business to grow into a return,” he said. “And if you need to reset the capital stack, bring in some junior capital, create more time for the business and ultimately more breathing room, then hopefully that enables the company to have better prospects to prosper.”
He also said that the team is “keenly focused” on the level of adjustments to EBITDA, making sure that the portfolio company’s cash flow, which is servicing a higher cost of the capital structure, is very clean and that the earnings can support interest coverage ratios and fixed charge coverage ratios.
Although he says that’s always been a focus, it’s “a heightened necessity to transacting today”, he noted.
The numbers don’t lie.
The top 10 global investment banks, CLO managers, asset managers and AmLaw firms all rely on Octus for our trusted deal analysis, credit intelligence and data. Do you?
Get to know Octus by the numbers. Scan the QR code. Powerful truths. Better credit decisions.
Market volatility and uncertainty are great for traders but perhaps less so for private credit fund managers.
What does the current macroeconomic climate mean for corporate borrowers, some of whom will be grappling with the unprecedented challenges of global tariffs?
Everyone I speak to in the industry says that it is impossible to predict what will happen next, but some are hopeful that Trump’s tariff policy will be a short-lived negotiating tool that will ultimately boost markets.
While it’s likely that corporate default rates will go up from a low base this year, it will only be a real issue for private credit if they hit unmanageable levels.
As so much direct lending is channelled to sponsorbacked firms, we can look to the private equity industry for the first signs of distress, so private credit should be well prepared for any future upheaval.
SUZIE NEUWIRTH EDITOR-IN-CHIEF
AlbaCore direct lending boss heralds flexible origination approach
DON’T BE fooled into thinking that senior direct lending is new territory for AlbaCore Capital Group, says Luke Gillam (pictured), despite the firm launching its first dedicated fund in the asset class.
The private credit specialist has been providing senior loans from its broader platform for years. But AlbaCore decided it now needed its own strategy within the franchise. This was partly driven by the value AlbaCore saw in senior credit following interest rate rises in 2022 and partly driven by limited partner demand. Indeed, the fund launched with significant commitments from Mitsubishi UFJ Trust and the Abu Dhabi Investment Authority.
To set up the fund, AlbaCore brought in Gillam as head of senior direct lending in October 2024 from Goldman Sachs, where he had spent 20 years, latterly as head of EMEA credit capital markets.
The fund, which announced its first close at $1.8bn (£1.4bn) in capital, will target mainly sponsor-backed businesses that have more
than €35m (£30.3m) to €40m EBITDA.
Gillam says “you're more likely to get market leaders, international diversification, product diversification and a stronger franchise” in this part of the market.
Geographically, the fund will largely focus on businesses in the UK, France and Germany, followed by some exposure to Southern Europe, Benelux and the Nordics.
And like many other lenders in this uncertain
time period, the fund will focus on defensive sectors such as software technology, business services and healthcare. He is keeping an open mind about consumer and industrial sectors though, where he says are some good companies worth lending to. The fund hasn’t made any investments yet but is in the process of closing a number of deals in the coming month or so.
The senior lending team will have seven people dedicated to
origination. In order to boost origination capabilities, many private credit managers have turned to tie-ups with banks in recent years. Despite coming from a banking background, Gillam says there are no plans to follow that trend.
“We really like the flexibility to be able to go out and source directly with private equity,” he comments. “That's really the focus, rather than something which we feel might be more narrow. A tie-up with a bank is probably more regionally focused.
“We like the flexibility of being able to originate across Europe and focus on direct bilateral relationships rather than going via a tie-up.”
However, he says it will be interesting to see how well these joint ventures work. Where the alignment of interest between funds and the banks are strong, it can work really well, in his opinion.
But he adds that he is “not convinced that in some of these [partnerships], the alignment of interest is that good”.
An interesting dynamic
in the current market environment is the growing interest in European direct lending versus the US. The US, as a bigger and more mature market, has always accounted for the bulk of direct lending deals. But investors are turning more
and more to Europe to capture better returns.
“When I started [at AlbaCore] late last year, this narrative around US exceptionalism was really dominant and we were thinking through the pros and cons of US versus Europe,” says Gillam.
“We actually felt we had a pretty good story why Europe was better than the US, but we were worried about the macro view biasing people's perspectives. Now I think you’re preaching to the converted because people really can see the benefits
of Europe. There are less competitive spreads, tighter structures and overall I think it is slightly less aggressive. But also, now the macro theme is switching away from that US exceptionalism towards more positivity about Europe.”
Market volatility creates distressed debt opportunity
OAKTREE Capital Management closed the largest distressed debt fund ever raised at the start of this year, attracting $16bn (£12.2bn) in capital. Strategic Value Partners is reported to be targeting $6.5bn for its latest distressed debt fund, and Ares has set a $7bn target for its third special opportunities fund, originating loans to companies in tough situations.
With the tariffs announcements from the US changing every day, and the unpredictability of what President Donald Trump’s next move will be, it certainly seems like the opportunity is ripe for distressed debt investors – at least those that have the dry powder to deploy. According to MSCI, distressed debt funds had a little more than $57bn of dry powder at the end of September 2024.
Following the tariffs announcement on 1 April, David Hamilton, managing director
and head of Moody’s Asset Management said that the tariffs heightened corporate credit risk, “increasing the likelihood of defaults and wider spreads.”
“The growing risk of a credit slowdown among medium- and small-sized companies could escalate into broader macroeconomic challenges,” he added. “The uncertainty dial just got turned up to 11.”
In a recent memo, Howard Marks, the founder and co-chairman of Oaktree noted that
“fear of defaults (not unfounded) has caused risk compensation in the form of yield spreads to increase substantially, leading to a meaningful increase in the available yields on credit. At the same time, we anticipate a higher incidence of distress and increased demand for bespoke capital solutions, meaning we’re likely to invest our latest opportunistic debt fund faster than otherwise would have been the case”.
Meanwhile, Patrick Warren, vice president at MSCI Research told
Alternative Credit Investor: “One of the things we saw during Covid was distressed debt funds called down quite a lot of capital. Obviously, there were opportunities there. There was also deleveraging, but those were the two things that we saw. Distressed debt out of all of the private capital strategies was the heaviest capital caller at that point. So certainly it is one of those asset classes that kind of can take advantage of big downturns like the one that we're seeing now.”
Structured credit piques insurers’ interest
INSURERS are showing growing interest in private structured credit and asset-based lending activity, as higher rates have weighed on direct lending origination.
Historically, direct lending was the predominant private credit sub-sector favoured by insurers.
However Katie Cowan, head of insurance client solutions at First Eagle Investments, said this is shifting.
“More recently, we have observed growing interest in other areas of the private credit universe by our insurance partners,” she said. "For example, private structured credit and asset-based lending activity.
“We believe these sectors serve as strong complements to insurers’ existing direct lending exposure as they work to broaden their allocation to alternative credit assets.”
Competition has hurt lofty returns in direct lending, prompting a search for newer growth opportunities, such as the asset-based finance (ABF) market and investmentgrade private credit as insurance companies search for higher yields, a recent report by ratings agency Moody’s found.
Around 62 per cent
of insurers plan to increase their private markets allocations in 2025, according to a survey of insurance CIOs conducted by Goldman Sachs, with 58 per cent saying they plan to increase their allocations to private credit.
Insurers often pursue different private credit sub-sectors depending on their investment objectives – whether to enhance risk-adjusted returns, achieve steady cash flows, improve capital efficiency, or leverage potential tax advantages.
For example, Cowan says that real assets private credit investments, such as owning and leasing railcars –which are integral to domestic supply chains and less vulnerable to technological disintermediation – can potentially generate long-term stable
income streams.
The pivot towards private markets among insurers is part of a longer-term trend going back to the years following the financial crisis, when persistently low interest rates prompted many insurers to reduce traditional credit exposure in favour of alternative asset classes.
This includes private credit, which has historically offered more attractive yields in exchange for perceived complexity and illiquidity.
“Even as yields on traditional credit instruments have rebounded, insurers continue to seek enhanced marginal returns, structural advantages, and potential diversification benefits available through private credit strategies, including structured credit and other forms of private
lending,” says Cowan.
Neuberger Berman said private credit markets have the potential to offer attractive structural advantages for insurance companies.
Private credit should continue to play an important role in insurance portfolios, giving insurers “more tools for tailoring their portfolios to meet their specific risk/ return requirements”, the asset manager said in a recent report.
Moody’s forecasted insurance companies will deepen ties with private credit. Synergies between insurance companies and alternative managers will grow, but, the credit rating agency warned, it “will be essential to monitor risks, especially credit and asset-liability mismatch risks.”
Moody’s expects the size and scope of the global private credit markets to continue to grow rapidly in 2025, spurred by lower interest rates, declining default risk and solid economic strength, led by the US and Europe.
Global private credit assets under management will jump to $3tn (£2.27tn) by 2028, the credit rating agency forecasted, reflecting greater momentum than in the past two years.
The value of integrated, real-time loan reporting
As companies continue to turn to private credit to meet their financing needs, the role of data in portfolio management has become critical. Accurate, timely, and comprehensive data is essential for assessing risk, valuing assets, servicing investors, and making investment decisions. However, private credit fund managers face significant challenges in managing their data and reporting across different systems, as well as accessing the necessary expertise to navigate these complexities.
One of the primary issues is disparate data sources and often incompatible technology solutions. This fragmentation can lead to inefficiencies, data loss, and delays in processing and reporting. Another challenge is the growing burden of regulation, increasing compliance costs, and the risk of errors. Fund managers need a cohesive data ecosystem that optimises processing, supports high transaction volumes, captures granular data efficiently, and provides transparency through flexible reporting capabilities.
Integrating technology and expertise
Aztec Group’s Loan Servicing Unit (LSU) offers a comprehensive solution to these key challenges.
The service combines the specific loan expertise of its team with the specialised capabilities of the eFront Debt loan processing system to provide end-to-end support for private credit funds. It is agnostic to NAV cycles, resulting in speedier and more efficient processing and the ability to provide real-time
position reporting to clients.
The service focuses predominantly on updating the Investment Book of Record (IBOR) which integrates seamlessly and immediately with the eFront General Ledger to create the Accounting Book of Record (ABOR). This integration eliminates delays and data loss that can occur when porting information between separate systems. Additionally, the LSU’s ability to model loan cashflows and returns from start date to maturity provides clients with immediate forecasts of loan performance and expected cashflows.
By profiling the loan events from day one, the LSU records expected cashflows and timings in the system as draft postings, allowing for efficient monitoring of expected cash receipts and shadowing of agents’ notifications. The LSU has also built a core suite of loan reports that can be provided to clients as frequently as daily, offering a real-time review of administrators’ workings rather than receiving quarterly reports several weeks after a quarter-end.
The LSU leverages these key components:
1. Real-time processing and reporting – this replaces historic accounting in arrears, meaning decisions are based on up-to-date data.
2. Automated and integrated reports – system-generated reports produce faster and more accurate reporting while reducing risk and human error.
3. Instant loan modelling reporting – the LSU provides instant loan modelling and future cash projection reporting of expected cash flows.
4. An expert team – a dedicated and skilled team of loan experts manages on-demand requirements for managers and investors.
Aztec’s unique integrated loan and GL model, expert teams, surrounding technology, and data management is providing fund managers with the comprehensive and timely reports they need to make investment decisions based on integrated data. Fund managers can now streamline the creation of regulatory filings and support daily NAV requirements. This has elevated the investor experience by providing transparency and enabling early detection of potential financial issues, giving managers a competitive edge in the burgeoning private credit market. By addressing the challenges of reporting and managing daily loan data holistically, Aztec has set a new standard for operational efficiency and investor satisfaction.
Please contact Kevin Hogan (pictured) to find out how our LSU can support you.
Article written by Kevin Hogan, Group Head of Private Credit at Aztec Group.
How P2P fits into your investment portfolio
RECENT GLOBAL MACROeconomic volatility has underscored the importance of diversified investment portfolios for both institutional and retail investors alike, sending many investors searching for alternatives to the mainstream markets.
Immediately after Trump’s tariff war began on 2 April 2025, stock markets around the world began to freefall, effectively devaluing many retirement and investment portfolios overnight. This recent chaos has highlighted the risk of being over-allocated to equities and bonds and overlooking the benefits of alternative investing.
While no investment has a guarantee of success, spreading your money across a variety of different asset classes can help to offset some of the impact of any big losses elsewhere in your portfolio; and alternative investments such as peer-to-peer lending can offer a compelling way to diversify beyond traditional asset classes like stocks and shares.
platforms such as Kuflink able to demonstrate a long track record of delivering competitive returns to investors, while managing risk to protect investor capital.
Unlike equity or fixed-income investments, P2P loans operate independently of the main financial markets, providing an attractive source of uncorrelated returns. This market is also well established and well regulated, with leading
Kuflink has been in business since 2011 and has been operating as a fully regulated P2P lending platform and Innovative Finance ISA (IFISA) manager since 2017. Over the past few years, the platform has witnessed an influx of new investors, as more and more people discover the benefits of maintaining a P2P allocation in their portfolios. These new investors have told Kuflink that they are interested in diversifying their asset allocation by including P2P investments within the alternatives
segment of their portfolios. They are attracted to P2P loans for a variety of reasons, including their long track record of performance and the possibility of earning fixed returns that can outpace the equity markets over time.
According to the most recent data from the 4thWay P2P And Direct Lending (PADL) Index, P2P and direct lending investors earned an average annual return of 7.61 per cent last year. In the 10 years since the index began correlating this data, annualised returns after costs have been 7.31 per cent per annum. Meanwhile, across the same period, the stock market has returned an average 4.77 per cent per annum, after reinvesting dividends and after costs.
Kuflink is currently targeting annual returns of up to 10.26 per cent for its investor base, by investing in British properties at low loanto-values (maximum 75 per cent) and taking a first and second legal charge on all loan collateral. Before onboarding any new borrowers, Kuflink carries out intensive due
diligence to ensure that the would-be borrower is creditworthy and likely to be able to maintain repayments, even in the event of a property market slowdown or destabilising macro-economic event. This conservative lending approach has already paid off. Kuflink was founded in 2011 and has already survived two recessions and a global pandemic, with zero investor losses to date.
“We are very proud of our track record of delivering for both investors and borrowers,” says Molly Hepburn (pictured), director at Kuflink.
“We are in constant communication with new and existing investors and the feedback we get is that they are appreciative of our long track record of preserving investor capital during tumultuous periods.
“This offers peace of mind to those investors who are now seeking to diversify certain areas of their portfolios, and it is encouraging to see so many savvy investors choosing P2P lending.”
While Kuflink’s track record
speaks for itself, it is important to note that P2P lending is not risk free. The key risk is that the borrower cannot make a repayment, leading to a loan going into default. Across the P2P sector, it is believed that the average annual default rate is around four per cent, although this will vary from platform to platform. Kuflink prioritises transparency and publishes all of its lending statistics on its website, with monthly updates. This includes information on late paying loans, forbearance activity and projected defaults. All investors should ensure that they are making use of these resources to better understand the risk associated with their P2P loan portfolio, and how Kuflink works to minimise defaults.
The risk of default can also be minimised by diversifying your P2P investments across multiple loans, rather than backing just one or two different projects.
Kuflink gives its investors the choice of investing in either an autolending account or a select lending account – or both. The auto investing account automatically spreads any investment across a multitude of similarly rated loans, creating instant diversification. Kuflink’s select lending account allows investors to pick and choose the loans that they wish to add to their portfolios. Both accounts offer IFISA access, which protects any earnings from taxation and allows investors to build up their investment pot a little more quickly.
Kuflink is one of the largest and longest-standing P2P lending platforms in the UK today, with more than £400m invested to date, and almost £300m repaid to investors so far. It has been regulated by the Financial Conduct Authority (FCA) since 2017 and works closely with the regulator on
issues relating to the sustainable growth of the P2P sector.
In recent years, the FCA has taken a more hands-on approach towards P2P lending platforms, in recognition of their growing popularity among retail investors.
The FCA has recommended that no more than 10 per cent of any investor’s portfolio is invested in higher-risk investment options such as P2P loans, to protect against the risk of defaults. However, this 10 per cent can act as a useful shelter from the storm clouds of the tariff fallout, and other macroeconomic crises. P2P returns are fairly stable, and do not react in real time when the markets take a hit.
As with any investment, P2P lending rewards those investors who do their own due diligence and maintain a well-balanced portfolio, and make use of all of the resources available to them. Kuflink has a highly proactive investor relations department who can answer any questions via live chat, email or over the phone, and investors are encouraged to reach out if they have any queries – no matter how small.
As more and more investors start to look beyond equities and bonds, P2P lending is increasingly emerging as an attractive diversification tool for investors seeking to balance their portfolios and seek steady returns in a well regulated investment environment.
Almost 20 years on from the launch of Zopa – the world’s first P2P platform – this asset class has evolved into a dynamic and well managed segment of the financial services sector with a good reputation for delivering returns. While P2P lending does carry risks, it remains a valuable tool for investors looking to add a new, potentially lucrative asset class to their portfolio.
Alternative Credit Awards 2025
This year’s Alternative Credit Awards will take place on 19 November 2025, at the Royal Lancaster London.
The event – hosted by Alternative Credit Investor – is the only dedicated alternative credit awards ceremony in the UK and has quickly become a mustattend industry event.
The evening will comprise a sparkling drinks reception, gala dinner and awards ceremony, commemorating the shining stars of the alternative credit industry.
Fund managers, specialist lenders and service providers will be presented with accolades on the night.
Categories include Fund Manager of the Year, Senior Lender of the Year and Fund Administrator of the Year.
Awards entries are open until 16 May 2025. Please access our dedicated awards website at alternativecreditawards.com for more details.
For sponsorship and table enquiries, please email sales and marketing manager Tehmeena Khan at tehmeena@alternativecreditinvestor.com.
The Alternative Credit Investor COO Summit 2025
Alternative Credit Investor is hosting the Alternative Credit Investor COO
Summit 2025 on 15-16 May at Chewton Glen Hotel & Spa.
This is an exclusive annual event for senior operational executives from leading private credit firms, held at a luxury five-star hotel that is easily accessible from London.
The overnight event will enable COOs and CFOs to connect and share valuable insights, through a mix of panel discussions, interactive roundtables and networking activities.
The Summit will tackle all the key topics affecting the sector, including navigating new LP requirements, the opportunities presented by AI and macroeconomic challenges.
The event is complimentary for senior operational leaders from alternative credit fund managers, including the overnight stay. Please email editor-in-chief Suzie Neuwirth at suzie@alternativecreditinvestor.com to request your place.
For sponsorship opportunities, please email sales and marketing manager Tehmeena Khan at tehmeena@alternativecreditinvestor.com.
Room for improvement?
Private credit valuations are coming under scrutiny, forcing GPs and service providers to ask what a good valuation process actually looks like. Kathryn Gaw finds out.
THE
RECENT popularity of private credit funds has come with enhanced scrutiny, and valuations are currently in the regulator’s crosshairs.
In March, a Financial Conduct Authority (FCA) review of private market valuation processes found that there was some room for improvement, and called on firms to enhance their processes for ad hoc valuations in times of market disruption. The regulator noted that robust valuation practices are particularly important as more retail investors begin to enter the market via new fund structures such as long-term asset funds.
The FCA said that it was pleased to see many firms showing evidence of independence, expertise, transparency and consistency in their valuations process, but added that “there is still more to do.”
Industry stakeholders have been largely supportive of the regulator’s intervention, and some have already begun to offer solutions to the valuation conundrum. These range from adopting enhanced transparency around in-house valuation processes;
to using third party valuers; to adopting new technologies which can provide up-to-the-minute data to investors and GPs.
“I can understand the FCA’s concerns,” says Karun Dhir, founder and managing director of Aurelius Finance Company (AFC). “Marking your own homework is never a good idea. The only way to give all stakeholders the necessary comfort is for the process to be carried out by independent valuers.”
AFC is one of the many GPs which already use independent third party valuations, as well as assessing its collateral in-house on a daily, weekly and monthly basis. Dhir believes that this
own independently-managed in-house valuation committees, in addition to using third party valuation providers.
“The absence of true independence within firms’ own
“ Marking your own homework is never a good idea”
strategy has removed subjectivity in the valuation process.
The use of third-party valuation advisers was highlighted as an area of ‘good practice’ by the FCA. In fact, the regulator has even suggested that there may be a need for GPs to establish their
valuation processes is often a symptom of a shortage of expertise and valuation committees being saturated with investment professionals,” says Ryan McNelley, managing director and portfolio valuations leader at Kroll.
“Addressing this problem will
certainly be easier if firms appoint independent valuation committee members, vetted according to their expertise in asset valuations.”
Myles Milston, co-founder and chief executive of Globacap, believes that enhanced use of technology is the only way to meet a high standard of valuation details.
“To adhere to the FCA’s requests, GPs must employ new technology, such as blockchainbased securities infrastructure, which can provide a more reliable and transparent approach to pricing private assets,” he says.
“Blockchain and distributed ledger technology offer a way to embed compliance, price discovery and reporting directly into
private market workflows. Using a decentralised and immutable ledger means that valuation data can be recorded in a way that is both transparent and auditable, ruling out manipulation or bias.
“Additionally, automated data collection and AI-driven analytics can enhance the accuracy of valuations by aggregating real-time market data and comparable transactions. These innovations can help establish independent and standardised pricing mechanisms, ensuring consistency across the industry.”
There is currently no universal industry standard process by which private market valuations are calculated, although most GPs
take inspiration from existing frameworks such as IFRS 9 and IFRS 13, ASC 820, the International Private Equity and Venture Capital Valuation Guidelines (IPEV) and the Alternative Investment Fund Managers Directive (AIFMD).
“As a general rule, the best valuation processes are those that show tangible evidence of independence, expertise, transparency and consistency,” says McNelley.
“While we can see some variation on a firm-to-firm basis, those adhering to best practices generally demonstrate clear accountability and oversight and maintain accurate records of how valuations are reached.”
Private credit valuations estimate the fair value of privately issued debt. They consider borrower risk, market conditions and interest rates, along with other variables. Loan terms are also a major factor in the accurate valuation of private credit funds. Semi-liquid funds typically offer quarterly liquidity, so the valuations are done on a monthly basis which allows fund managers to more quickly adapt to macro-economic events such as the recent US tariff war. However, it is a different situation for closed-ended funds, which can have terms of five to 10 years.
“I think the situation on closedended funds could be improved to get better transparency,” says Francesco Filia, founder and chief executive of Fasanara Capital.
“Of course, transparency can be improved, but I think it is more of a specific problem with the closed-ended funds.”
Across private markets, private debt assets have the highest valuation frequency, given that valuation inputs such as yield spread
can be more easily determined than for other asset classes.
A recent report from Macfarlanes predicted that the FCA guidance would lead to a movement towards even more frequent valuations, especially if net asset value is used for financing or subscriptions and/ or redemptions, or if the fund is accessible to retail investors.
“Given the volatile markets and unclear economic environment ahead, private credit valuations will certainly come under the microscope,” says McNelley.
“Expect a real focus on establishing robust, credible and independent valuation frameworks, both to meet regulatory concerns and – just as importantly – investor concerns.
“It’s important that the FCA continues to engage with firms and industry bodies on good practice, so that all parties are aligned on how the industry can achieve greater consistency in the year to come. And ad hoc valuations as a topic is not going to go away any time soon.”
Ad hoc valuations in private credit are unscheduled, situationspecific assessments of a loan’s value, often triggered by material
of the market volatility caused by trade and tariff uncertainties.
However, KBRA added that the ultimate impact on borrowers will vary significantly, driven by their unique exposures to the tariffs.
“ Private credit valuations will certainly come under the microscope”
events, portfolio reviews, or borrower-specific developments affecting creditworthiness. Last month, Trump’s tariff war sparked fears of a global recession, which raises the risk of credit defaults in the medium term. In a post-tariff analysis, KBRA predicted that private credit exit opportunities, company valuations, and market multiples will be reduced as a result
“Geopolitical tensions can lead to unpredictable shifts in market sentiment and asset values,” warns Regina Marinina, chief risk officer at Mount Street.
“These uncertainties can particularly affect leveraged borrowers who are more sensitive to economic fluctuations.
“Given the heightened volatility, there may be a growing need
for more frequent valuation updates. While quarterly updates are becoming standard, some clients are considering more frequent assessments to ensure valuations remain accurate and reflective of market conditions.”
Marinina adds that despite these challenges, the inherent flexibility of private credit should sustain demand. In fact, some believe that enhanced regulation of the valuations space could make private credit even more appealing to investors.
“Robust and independent valuations should further enhance the attractiveness of private credit as an asset class,” adds Dhir.
“We are overall very positive on the outlook for private credit in the medium to long term, but the unpredictable and fast-changing
political landscape on both sides of the Atlantic is doing its very best at the moment to stifle deal making in the short term.”
In this sense, the FCA’s review is particularly timely, as private credit assets under management are tipping into the trillions, while the economic backdrop is shifting dramatically.
“While there is room for improvement, it’s important to acknowledge that there’s a lot of good work going on in the valuations space and the FCA review shouldn’t be seen as a net negative reflection of our sector,” notes McNelley.
“It’s clear that firms generally recognise the importance of maintaining robust processes and have demonstrated that they understand the importance of
investor protections. However, firms can certainly act on the FCA’s findings to improve, whether by identifying all potential valuation-related conflicts of interest, maintaining functional independence in valuation processes, or establishing clear procedures for ad hoc valuations.”
The FCA has been clear in its guidance that it expects firms to be able to identify, document and assess all potential and relevant valuation-related conflicts, their materiality and the actions they may need to take to mitigate or manage them. This includes the need for better identification and documentation of potential conflicts of interest in the valuation process, and increased independence within firms’ own valuation processes. This guidance
is largely in line with recent assessments from other European regulators, signalling a wider trend for enhanced disclosure in the space. As such, firms are being urged to look at their valuations processes now, and start making improvements in anticipation of upcoming rule changes. GPs can do this by obtaining valuation services from regulated providers, and committing themselves to adhere to higher professional standards, processes and best practice.
“If not outsourced to an external provider, in order to address conflicts of interest, I expect GPs to adopt internal policies identifying potential biases, for instance, separating the valuation function from portfolio management or investor relations and ensuring independent valuation committees regularly review these risks, with minutes evidencing discussions,” adds Marinina.
“While there is a possibility that some investors might be concerned about the increased scrutiny and potential costs associated with these improvements, I believe that implementing these improvements will enhance trust, traceability and transparency, thereby attracting investors rather than deterring them.”
As private credit continues to attract a broader investor base, the integrity of valuation practices has become a central focus for regulators and market participants alike. But by embracing best practices and preparing for forthcoming regulatory developments, the industry has an opportunity to build deeper investor trust and cement private credit’s role as a robust and transparent asset class for the future.
AI-powered credit intelligence takes another leap forward
By Sreekanth Mallikarjun, Ph.D., Octus
Credit intelligence has been forever changed by the introduction of advanced AI solutions, powered by generative AI and proprietary models. Investors no longer need to manually search through multiple data rooms and sift through countless deal documents to find the data and insights needed to make confident, informed decisions.
Advanced generative AI (“gen AI”) solutions can now be tailored to the unique needs of buy side professionals – revolutionising the way credit data and insights are accessed, analysed and acted upon. The team at Octus has been testing, improving and implementing gen AI for nearly a decade. With clarity, speed and precision paramount for making market-moving decisions, utilising cutting-edge AI solutions is a non-negotiable for investors in today’s rapidly changing markets.
Precision at speed
Through generative AI, relevant insights into the world of credit can be delivered instantly through simple natural language questions. All an investor has to do is inquire about the key covenants for an agreement, or how terms compare to others within their portfolio and the technology can query their entire document ecosystem – eliminating the need to sift through countless
files. While speed is key, better data brings smarter decisions. Where traditional systems may deliver outdated or incomplete data, AI-powered platforms are continuously updated in realtime, ensuring not only speed, but more importantly, precision.
Transparency when evaluating credit data is equally as important. Robust chains of verification are necessary to confirm any insights link back to the correct documents, without risking false interpretations. CreditAI Vault by OctusTM uses in-house extraction methods to pull information from complex deal documents, including images, footnotes, charts and tables – ensuring no data or pertinent information is missed or falsely classified.
Don’t sacrifice security for speed
Speed is a competitive advantage, but it means nothing without compliance and security. Moving too quickly can open you up to mistakes, so it’s essential to partner with technology companies that remove that risk where possible. Unlike the traditional solutions mentioned earlier that risk data exposure, enterprisegrade permissioning architecture provides iron-clad security for
user-specific data. For CreditAI Vault, we went a step further and built it in our SOC2-certified environment, making it one of the most secure options available for financial intelligence.
As the amount of private credit data available continues to rise, with the asset class growing exponentially, having data governance and compliance at the highest standards will be critical to protecting yourself and your organization. With the right permissioning, private data stays secure, while only permissioned stakeholders access sensitive information and proprietary and private deal files.
Real world use cases
For a credit analyst who manages vast portfolios on a daily basis,
manual document review is a time-consuming task. Solutions like CreditAI Vault allow users to simplify their workflow and use natural language to get analystgrade responses to questions about the credits in their portfolios in seconds. This frees analysts up to make more strategic decisions. Those same decisions can be made confidently by buy side professionals when the intelligence being delivered on structured debt, portfolio trends, financial health and comparable deals is backed by a verification chain. AI-powered credit intelligence puts the focus on the decisions that matter most for the bottom line, allowing for better, faster market moves that are grounded in precision data – both public and private.
Finally, these solutions help to navigate complex regulations. CLO funds and buy-side legal teams will no longer need to spend days combing through disclosure filings. With vital compliance data available on-demand, inefficiencies can be removed and you can be confident in your moves.
The future of credit intelligence
We launched our original AI solution, CreditAI, in 2023 and when we brought it to market, we introduced an entirely new way of thinking about credit intelligence. The advancements made in AI technologies in just under two years have been incredible. We’ve gone from the ability to query a database for specific credit data and insights, to
instant credit intelligence across all structured and unstructured private and public credit data.
As the AI innovation timeline continues to shorten and organisations embrace the promise, rather than the uncertainty, of the technology, companies like Octus will further empower financial professionals with the tools that redefine what’s possible. I believe that the best technologies we can provide to the financial community aren’t just mere upgrades but a transformation that aligns with how you work. By understanding and listening to those that use these solutions on a daily basis, technology providers can deliver the functionality needed to influence the markets of today and tomorrow. Now the question is, what will you do with it?
Open for business
Warren Mutch (pictured), head of speciality finance at Shawbrook Bank tells Alternative Credit Investor what he looks for in a new lending partner, and why his team has ventured into the fund finance market.
Alternative Credit Investor (ACI): Tell me about your work at Shawbrook Bank.
Warren Mutch (WM): I've been at Shawbrook since 2017. I head up the speciality finance team within the bank. Our customers are all specialist non-bank lenders, and our team are major funders to those lending businesses.
ACI: Why do you choose to work with non-bank lenders?
WM: That market has been around for many, many years. Coming out of the financial crisis, a number of banks were retrenching from certain markets, and at the same time we saw increasing levels of non-bank lenders launching, and those lenders obviously needed funding to grow their loan books. That trend has continued as the supply of credit has evolved away from more mainstream banks to challenger banks like Shawbrook and non-bank lenders.
ACI: What kinds of lenders does Shawbrook prefer to work with?
WM: We have around 85 customers, all lending businesses of one type or another. We tend to put them into three main buckets: consumer lenders; small- and medium-sized enterprise (SME) lenders; and property lenders.
Our typical facility size would be anywhere between £10m and £50m.
That means that the lender is not a startup – the business is up and running, it's originating loans in markets. We would then step in to help grow the business, and take it to the next stage.
ACI: What is the approximate split between those three buckets?
WM: It's evolved a little bit over the last few years. Historically it probably was a third each. I'd say now between 50 and 60 per cent is in that property bucket, and the other two are quite evenly split.
The number of new entrants into the property subsector has been quite material. It's relatively easy to launch a new property lending business, and we've seen a number of new entrants over the last five years. And these entities are obviously looking for funding to help grow their loan books. So it's mainly been a demand-led aspect. Whereas by contrast, we've seen relatively few newer consumer lenders approaching us for funding.
ACI: Do you do any other types of lending?
WM: The specialism for our team is just to focus on non-bank lenders. Albeit we have started to do more
fund finance in the last two or three years.
We started to see that lending businesses were being operated on occasion through a fund structure. So operationally, it looked and felt very much like the lending businesses that we were used to supporting over the years, but they were structured as a fund and were raising investor capital and were looking for a modest amount of leverage to support their lending activities. So we soft launched into providing funding to those types of funds.
We have tried to grow our remit in fund finance to incorporate some of the more traditional elements of fund finance, such as subscription facilities. More recently, we have been looking into traditional private equity funds too. We completed our first deal to an equity fund in the first quarter of this year. So we’re trying to broaden out that fund finance proposition as well.
ACI: What is your outlook on NAV financing?
WM: The fund finance market has historically been dominated by subscription facilities and investor call bridge facilities. And that
product has worked very well for funds in the investment phase of the fund's life. I think what funds are increasingly conscious of is funding in the second half of the life of the fund – so the realisation phase. And if you think about funds looking at buy and build strategies or maybe exits being delayed due to some macroeconomic challenges over the last few years, then having facilities available towards the back end of the life of the fund appears to us to be increasingly in demand. I think that trend will continue.
ACI: How do you choose your lenders?
WM: We try to work out, are they a good, growing, sustainable lending business in their chosen market? So in the property lending world, can they demonstrate that they can originate a return that is sufficient to cover its costs, including the costs of funding from Shawbrook, plus
ACI: What is your view on private credit this year?
WM: We have seen an increase in the number of private credit funds interested in this market. But equally, there are credit funds that lend into all sorts of sectors. From a fund finance perspective, we provide facilities to private credit funds as well to help them grow their activities. So we expect to see private credit funds compete with us for those who are specialists in supporting lending businesses. But then equally, we do expect more opportunities to lend to private credit funds as they continue to grow.
ACI: What is your view on peerto-peer lending?
WM: It's not a sector that we’ve been active in. What we've seen over the years is that P2P lending has evolved. It was originally set up as a retail model, so individuals
“ We expect more opportunities to lend to private credit funds as they continue to grow”
their operational costs and any bad debt costs that they may have? And if they can demonstrate that they can do that in a safe and sustainable manner, then those are the key highlevel points.
We’re looking at their management team and track record. We're looking at their policies and procedures, their systems, and then ultimately, their loan origination and redemption track record in their market. It could be their specialisms in a particular product. It could be their specialism in a particular geography. It's just about understanding that niche and making sure that they're operating successfully in that niche.
could put money into a P2P firm that would then lend to individuals or businesses. From what we've seen, that's evolved towards institutional funds putting money into P2P platforms.
Those P2P platforms generally operate an off-balance sheet model, i.e. the loans are not necessarily on the balance sheet of the lending business, and rather, they are funded by the investors. Whereas for our team, the types of lending businesses we are funding are onbalance sheet lenders, where for every £100 loan, Shawbrook might put in £80, the lending business might put in £20 of their own
money, and then they – the lender – would lend to the underlying borrower. So from an accounting perspective, the loan would sit on the lender's balance sheet and the liability to Shawbrook would sit on the balance sheet as well.
We probably wouldn’t consider investing in P2P platforms, although we have seen lenders operate a mix of funding models. If they have a P2P operation and then a separate on-balance sheet operation, we would consider that.
ACI: What are your investing aims for 2025?
WM: We went through £1bn of limits to over 80 customers last year, and we're broadly up to approximately £1.2bn currently. Our primary aim is to continue to grow our customer base and limits over the course of this year.
ACI: Do you have any more partnerships on the horizon?
WM: Certainly we're looking to onboard new lenders. And that's from a debt funding perspective. We would typically aim to onboard at least 10 new lenders each year. And so in that regard, we plan to expand.
We want to see a steady onboarding of new customers, but just as important is growing with our existing customers. So last year, for example, for our existing customers we increased limits by over £140m. It's a really important strategy for us that once we’ve onboarded the business, we need to be able to grow with them as they expand their business. It's that flexibility that a lot of our customers really value. And so we will hope to grow just as much by increasing our existing customers as onboarding new deals.
The world’s leading resource on alternative credit
Keep abreast of the latest news and updates on the fast-growing alternative credit market by connecting with Alternative Credit Investor magazine on social media.
Twitter/X: https://twitter.com/altcreditnews
Facebook: https://www.facebook.com/alternativecreditinvestor
LinkedIn: https://www.linkedin.com/company/ alternativecreditinvestor
Instagram: https://www.instagram.com/ alternativecreditinvestor
Access our website at alternativecreditinvestor.com
