US investors who have been holed to private credit space over the last couple of years now are inclining towards the increasing specialty finance market where competition isn’t so fierce as well as spreads are much more attractive.
Due to the complexity related to lending structures, specialty finance space forms just a tiny fragment of the cash flow lending market currently. However, investors now are attracted to possible double-digit figure returns as well as improved protection offered by asset collateralization.
The specialty finance companies are non-bank finance lenders which make loans available to small or mid-size businesses as well as consumers that might face difficulties to obtain finance otherwise. The space spans a broad array of strategies, including asset finance, life sciences, shipping, aviation leasing and equipment financing.
US investors are specifically attracted to the underlying collateral support offered for loans. In the previous two decades, asset-based financial loans faced less than 1/3rd of the yearly default cash flow loan rates.
With the spreads compact in the direct finance lending market due to increased competition among the players, the investors having private credit have been forced to look someplace else for returns.
Only $22 billion had been raised worldwide in private credit during the 3rd quarter. Europe lead the charge with $13.9 billion raised whereas the US lagged behind with only $6.5 billion raised, as per data company Preqin.