6 Ways Private Credit Will Evolve in 2021

As volatile and capricious as the year 2020 was, the rapid evolution we’ve experienced in private credit has been positive for both institutional investors and those seeking capital.

Looking ahead to this year, I see the following trends in our space, in terms of both new investment opportunities and improvements in the way transactions happen.

1. Co-investing will increase in size and frequency. Institutional investors will find more ways to co-invest alongside specialty lenders and thereby deploy more capital in a fraction of the time and cost required to source and close deals organically. Specialty lenders can benefit by augmenting their existing capital base to exponentially increase their origination volumes. Investors and specialty lenders will turn to digital marketplaces to find each other and execute these transactions.
2. More opportunities in non-U.S. middle market lending. Non-U.S. markets such as Canada, Germany and Latin America have rigid banking systems that restrict lending to middle-market companies. Because these companies don’t typically meet the criteria for bank loans and aren’t large enough to issue bonds, they need access to private credit for growth capital. This presents an opportunity for investors to provide loan facilities to promising companies, in relatively conservative transactions with standard lender protections and potentially higher yields.
3. Institutions will find credit opportunities in new ways, and across a wider range of asset classes. New technology will enable large financial institutions, insurance companies, pension funds and family offices to identify and connect with differentiated opportunities that they previously had limited ways of finding. Sectors to watch in 2021 include equipment leasing, bridge lending, distressed real estate loan portfolios and solar construction financing. We also expect to see increased interest in non-correlated asset classes such as litigation finance, which is growing in popularity.
4. Remote, data-oriented due diligence will continue. The most obvious change in due diligence has been a shift away from traditional in-person site visits, since they weren’t possible during the pandemic. While due diligence has become less personal, it has also become more digital, with a greater focus on data collection and quantitative analysis. When conditions normalize, site visits will likely resume, but the deeper data dives will persist, offering investors new and differentiated insights into target companies.
5. Virtual deal-making is here to stay. Another big change in 2020 was virtual deal-making. Even though videoconferencing has been around for more than a decade, the pandemic has forced the industry to adopt video calls, and the transition has gone well. In our business, transactions are moving faster and more efficiently: By replacing travel, dinners and golf games with video meetings, closings can accelerate. Virtual deal-making has also exponentially expanded business opportunities, enabling transactions to be conducted from anywhere, at any time. 
6. Growing interest in short-duration direct-lending opportunities. Keep an eye out for an uptick in highly secured short-term lending opportunities. Despite the roll out of vaccines in many countries, the global economy remains fragile. Institutional private credit investors are likely to seek out short-duration opportunities, as short as 6 months, with strict covenants.

We see plenty of room for optimism in 2021 as new opportunities arise and new ways of doing business fuel activity in the private credit space.

More than any other year in recent memory, 2020 taught us that both humans and capital markets are resilient. Investors always have capital to deploy, and businesses always have the need for that capital. At Finitive, we’re excited to be acting as a hub for investors and capital seekers to find each other and transact.

Jon Barlow is the Founder & CEO of Finitive, a technology platform providing institutional investors with direct access to private credit transactions. For more information visit www.finitive.com.

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 and are not suitable for all investors.