Talking Heads – Introducing private credit to a wider audience

This is an edited transcript of the Talking Heads podcast episode Private credit is worth more public attention

Andrew Craig: Welcome to the BNP Paribas Asset Management Talking Heads Podcast Every week, Talking Heads will bring you in depth insights and analysis to the lens of sustainability on the topics that really matter to investors. In this episode, we’ll be discussing an increasingly important sector in asset management, and that’s private credit, which is loans to borrowers who do not have access to public debt markets. I’m Andy Craig, Co-head of the Investment Insight Centre, and I’m joined today by Stephane Blanchoz, Head of Alternative Solutions. Welcome, Stephane.

Stephane Blanchoz: Hi, Andy. Great to be here.

AC: Well, perhaps we can start by you explaining to us what private credit is and the difference between European private credit and US private credit.

SB: In a nutshell, private credit is all about direct lending to companies by non-bank institutions or private lenders. Following the Great Financial Crisis, post 2008, you’ve been seeing growth rates of private credit by 10-15% a year for the last 15 years. This was very pronounced in the US and followed in Europe.

So, around the difference between European private credit and US private credit: on the one hand, in the US, we have a much more mature market. While in Europe, we have, I would say, a wide range of untapped opportunities. To some extent, credit metrics are slightly better in Europe than in the US.

For instance, when we talk about interest coverage ratios, so the revenues of the company divided by the interest, ratios are better in Europe than in the US. But more importantly, it’s the opportunity scope that is much larger currently in Europe.

AC: Just to be clear, when you’re talking about non-bank lenders, we’re basically talking about asset managers? Is it asset managers who are lending to these mid-sized businesses?

SB: It is a good point. We’ve been seeing insurance companies, pension funds wanting to have access to private credit. But if you want to tap your toes into this activity, you need specialised teams, you need to deep-dive into the companies. These pension funds, insurers, they liaise with asset managers which have built expertise and teams dedicated to private credit. You tend to have lots of close relationships between asset managers and insurance companies or pension funds in this sector.

AC: Let’s talk about your strategy for investing in private credits. What do you think of the particular advantages of your strategy and your approach? What makes it better than your competitors and what differentiates it from the competition?

SB: First, [the] differentiating factors that we have: a proximity to companies. We are part of a large group with a strong coverage across Europe and being part of one of the leading financial institutions in Europe, we have access to this type of opportunities. The second element would probably be the ability to allocate across a wide range of different credit segment, from corporate lending to infrastructure or even real estate. So, we have this broad range of opportunities.

And maybe the last point would be on sustainability, which has always been at the heart of our investment processes. We’ve been pioneering methodologies in this field. For every transaction we are doing, they are a strong element of our assessment. That’s an important element for investors in this asset class who are often institutional investors capable of investing for the long term.

AC: If I understand correctly, one of the particularities of private credit is that it ties up money for quite long periods. There is what we call a new liquidity premium when you invest in private credit.

SB: You need to have a long-timeframe when you look into private credit. That’s an important point that we should highlight. It’s a remuneration you get for a given level of credit risk as opposed to [investing] public markets. It’s mostly due to flexibility. You can’t trade easily your debt. If you’re ready to give up some liquidity for return, this is clearly an asset class that has a strong potential.

AC: You mentioned pension funds, insurance companies. These are investors who have long time horizons and who are able to invest over those time horizons. They are looking to be paid for the fact that they are locking up capital for long periods. And that’s the liquidity premium that you mentioned, which is at the heart of the asset class, isn’t it?

SB: Yes. And you could see the trends. It’s all the regulation that we have seen in the last 15 years [ that is] actually preventing banks from lending long-term unless they would put more capital in front of that. At the same time, we [have] Solvency 2 in Europe because it’s really appropriate when you have a long-term horizon to consider this type of asset class. You are seeing the ecosystem being built around it. The fact that these assets correspond to the liabilities of institutional investors like insurance companies and pension funds has created this market, which has become significant within financing different sectors.

AC: Yes, exactly. And what is important to highlight as well is the fact that when we talk about disintermediation, it does not necessarily mean that private lenders are replacing banks. Can we talk about the outlook? What is your outlook for private credit in 2025 and how do you think your strategy will evolve in the coming year?

SB: We have taken a long-term view on this type of strategy. It means that we cannot be opportunistic about credit condition, how it will evolve, should I invest now or later because there is an element of illiquidity. What we are seeing is an increasing trend on democratisation of this asset class, it’s about access to individual investors. That is being regulated and favoured.

The second element is you are seeing more partnerships between a bank , insurance company, asset manager to try to capture the chain. The third trend I would see is probably more diversity in private credit, meaning that we’ve been seeing this trend for corporate credit, infrastructure lending, for asset-backed finance, equipment leasing, specialised lending, other types of lending.

Now coming back to the environment, our view is [that] we are seeing interest rate decreases, which is actually good when it comes to lending for companies because it’s less expensive for them. We are seeing M&A activity that is picking up again. We are seeing a challenging context: geopolitical risk and other elements that could be concerns. But when we take a long-term view on private credit and on the trends, we believe there are opportunities.

AC: Well, thank you very much, Stephane.

SB: Thank you, Andy.

AC: If you’d like more information about private credit and the investment opportunities it offers, please reach out to your BNP Paribas Asset Management contact or check out Viewpoint, our website for investment insights at viewpoint.bnpparibas-hyphen-am.com. You’ve been listening to the BNP Paribas Asset Management Talking Heads podcast with me, Andy Craig and Stephane Blanchoz, Head of Alternative Solutions.