The increasing inability of banks to satisfy the total demand for credit is a global phenomenon. The structural inefficiency of the banking system was exposed by the credit crunch in 2008. The consequent introduction of Basel III, which has required banks to hold more capital against their loan books and more efficiently match assets and liabilities, has led to increasing operational inefficiencies in the banking system. Notably, these changes have limited the ability of banks to grow their loan books and have increased pressure on banks to do shorter term loans to fewer clients, with pressure on pricing, i.e., the cost of bank funding has steadily increased. As a result, many banks no longer offer the growth or acquisition finance solutions that they previously did because the associated cost of capital is too high. If they do, the process is increasingly cumbersome. The general trends in banking are slower turnaround times, unpredictable and inconsistent credit decisions and increased pricing, all of which makes financial planning for a business very difficult. Most importantly, these regulations are here to stay and may, in time, become even stricter.

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This has culminated in a growing opportunity in the direct lending asset class, which, combined with investors’ thirst for inflation-protected yield and returns that are uncorrelated to the market, has since 2008 given rise to exponential growth in credit funds globally, now formally referred to as private credit. Because private credit funds and other non-bank lenders backed by pension funds and insurance companies are typically not leveraged (our funds are entirely unleveraged), unlike banks which are highly leveraged, lending via private credit poses less systemic risk to the broader economy. Private credit thus plays a crucial role in supporting the real economy by injecting capital to support growth without the associated risk to the economic system that is inherent to lending only via a highly leveraged banking system. For investors, there are several reasons to inject capital into private credit, listed below.