In this week's penultimate blog of 2023, we look at the increase in interest around institutional investors increasing their exposure to different forms of the credit market and how the overall sector, including P2P, has suddenly become the alluring big-ticket investment opportunity we predicted it would become, way back in Q1.

Downing LLP recently published a report indicating two key factors. Firstly, there is considerable interest in credit markets once again, and secondly and most importantly, investors are still massively underexposed after the inflationary run-to-the-hills panic. In total, 91% of those institutions polled stated they would increase their exposure to credit markets in the coming year; the report even says that "real estate development finance is a particularly attractive sector" for long-term investors despite the economic circumstances we find ourselves in. This is interesting; we have long espoused the virtues of P2P backed by real estate being the perfect conduit for institutions entering from the private credit arena, and we are now seeing evidence that some of these more significant entrants are circling.

The overall inflation rate has been slowing in the UK since October 2022, and the Fed has confirmed a similar situation is unfolding stateside, so the roadmap for the ongoing restructuring of institutional portfolios will now once again be refocusing on yield and private credit markets to provide deal flow and illiquidity premium for enhanced returns. Until recent months, the overarching institutional fear is that higher interest payments on variable rate debts damage the borrower's balance sheets. At the same time, the rising inflation coupled with their existing leverage inhibits the business's ability to grow, increasing defaults, and credit becomes a less attractive investment. Now that we have seen a slowing in the tightening cycle, it's time to reassess that worldview.

Here, we could see the beginnings of a course correction back to how it was rather than something new; the growth of private credit market investing had been substantial in the last decade, driven by a confluence of factors reshaping the financial landscape. As traditional fixed-income investments faced challenges like low yields and market volatility before the pandemic, institutional and retail investors turned on-mass to the private credit market for higher returns and portfolio diversification. With its potential for higher yields, private credit became the attractive option for a reason, and with the new normal post-pandemic of institutional money sitting in low-yield bond plays and treasury-backed assets as a safe haven having a finite lifespan, the model will eventually have to be rethought as cash is redeployed into the arena of more competitive returns. The question we are considering, looking at the rising market cap of private credit markets and then at the increasing market cap of P2P, could that be a signifier of how big this sector could also become, given it's the same institutional players and investors circling the periphery?

Interestingly, we have also recently seen the Bank of England reference the vulnerabilities of the private credit markets in their latest Financial Stability Report, which highlights the potential impact on these markets if long-term growth remains subdued for the reasons explained above; these kinds of market conditions, low growth, increase defaults, lower leverage, erode the overall attractiveness of the asset class. However, this is a deliberately measured and sober take on the situation; the other way to frame the environment is that a sustained period of low growth creates enormous demand and opportunity in private credit markets, and indeed, the same opportunities in P2P, where institutions are investing to service very high demand, there is an opportunity to make a very profitable market.

In a piece published at the start of Q4 of this year, Morgan Stanley predicted that private credit could become a £2.3 Trillion market by 2027; the UK P2P sector by revenue as of July 2023 was 376M, a bit of a difference, yet the upside on display here given the similarities is potentially astronomical.

If you are a client, a partner or an associate of Invest&Fund and have enjoyed reading the weekly blogs over the last 12 months, we thank you. There will be some lighter-going "roundups of a year in development finance" over the next week or so before we head into the holiday season; our team will be working hard throughout to make sure your client's projects move successfully into 2024, as always.

May we be the first to say, from everyone here at Invest & Fund, have a Happy Christmas and a lovely New Year.

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