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Global private credit market on the path to sustainability

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Jake Mincemoyer

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10 November 2021

According to a new research paper, Financing the Economy, published by the Alternative Credit Council (“ACC”) in partnership with Allen & Overy, private credit managers are accelerating the integration of ESG into their investment strategies and engagement with businesses on sustainability. 

The ACC surveyed 57 private credit managers and investors based across the US, Europe and Asia Pacific that collectively manage more than USD600bn.  The research found that 74% already integrate ESG into their investment strategies and consider it to be a core part of their approach to due diligence, borrower engagement and investor reporting.

Beyond investing, the survey found that managers are a growing source of guidance and technical support on sustainability issues for many SMEs and mid-market businesses. Almost half of private credit managers see this service as their biggest value-add on ESG issues, and nearly a third see their ability to influence ESG outcomes as their biggest strength.

A third of firms reported offering ESG-focused private credit products that incentivise businesses to become more sustainable, for example by linking the interest rate to ESG-related criteria.  Such products are likely to become more prevalent, with a further 28% of respondents planning to make loans with ESG-linked financial incentives in the future.

The research reveals that private credit managers provided an estimated USD196bn of credit to the economy during 2020, a 74% increase on the $113bn respondents predicted they would invest when surveyed last year.

The main recipients of credit continue to be SMEs and mid-market businesses, with 74% of respondents’ most common loan size being below USD100m. The research also finds that a significant part of the market is now focusing on larger businesses, with 26% of respondents describing their most common loan size as greater than USD100m, up from 10% last year.

Jiří Krόl, Global Head of the Alternative Credit Council, commented: “It is encouraging to see how quickly the industry adapted and deepened its approach to ESG integration. There is broad agreement that we are still in the early stages of development when it comes to methodologies, loan documentation and engagement practices. It is also clear that while regulation can be helpful in some ways, the real driver of change is the industry’s desire to innovate and deliver for its borrowers, investors and society at large.”

Jake Mincemoyer, Head of US Leveraged Finance at Allen & Overy, added: “Over the last decade, private credit has developed into a global and highly-diversified market, in excess of USD1tn. With the increasing volume of capital being provided to SMEs and middle-market businesses and the growing size and frequency of mega-deals in private debt, managers have also seen greater focus on ESG principles across the global private credit market. While some regions have seen broader adoption of these changes than others, there is no doubt that ESG principles will remain a growing focus over the coming years.”

The paper also includes contributions from leading private credit managers and investors from the following firms:

  • ADM Capital
  • AIG First Principles
  • Allianz Global Investors
  • Arcmont Asset Management
  • Ares Management
  • BlackRock Alternative Investors
  • Cheyne Capital
  • CVC Credit
  • Hayfin Capital Management
  • Newmarket Capital
  • Oak Hill Advisors
  • Railpen
  • Teacher Retirement System of Texas
  • Tikehau Capital
  • Tor Investment Management

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