Private credit is now firmly established as a mainstream investment by institutional investors with the asset class on track to reach $1trn (€0.9trn) of assets under management by 2020, according to new research.

Europe has become a core region for private credit investors with Germany leading the way, according to the survey of 70 private credit managers, conducted by the Alternative Credit Council – the private credit affiliate of the Alternative Investment Management Association (AIMA) – and law firm Dechert.

Respondents managed an aggregate $470bn in private credit investments.

Over 70% of all private credit committed capital came from institutional investors, according to the study, at a time when the “historically unprecedented liquidity support” provided by central banks in recent years was likely to end.

Of the committed capital, 38% came from North American investors and 31% from Europe, excluding the UK.

Much of the growth in European lending over the past year came from Germany, the survey reported, with German sponsors and borrowers increasingly embracing private credit.

Businesses supported by investors were getting more diverse, the Alternative Credit Council found. While 41% of European respondents’ capital was allocated to SMEs or mid-market borrowers, managers were also increasingly lending to a wider variety of borrowers outside the mid-market, from smaller businesses and start-ups, to larger corporations, real estate and infrastructure projects.

European managers reported average allocations of 19% to real estate, 9% to large corporates and 8% to trade finance. However, distressed debt – relatively popular with North American investors – made up only 3% of European allocations.

The survey report said: “The continued difficulties faced by European banks in offloading their non-performing loan (NPL) books, along with fragmented creditor protection frameworks across Europe, means that the market for European distressed debt remains less attractive. This may change in coming years, as policymakers continue to encourage a more active NPL market in Europe.”

Growing competition for private credit investments had created a buyers’ market for borrowers, with the report noting that companies were seeking more flexibility on loan covenants and driving a hard bargain on pricing. However, managers said there were still risk baselines they would not cross.

Looking ahead, private credit managers expected continued growth across the asset class, with a third of respondents planning on increasing allocations to SME and mid-market lending over the next three years.

However, they were also preparing for the possibility of an end to the current credit cycle and tougher economic conditions for borrowers. As such, said the report, managers were increasingly lending at positions higher in the capital structure, and moving away from cyclical sectors.

See also: IPE’s Credit Investing Special Report from the November issue