As we continue our exploration of the results of our "Financing the Economy 2023" private credit survey, in partnership with the Alternative Credit Council (ACC), it’s time to take a look at the cautious optimism that private credit managers are feeling about current capital deployment opportunities. Based on the report, we estimate that private credit managers invested $305 billion in 2022, or an increase of about 50% over 2021. This increase has been driven by larger lenders with the ability to deploy more than $10 billion, with the market consequently becoming concentrated in these larger lenders.
The deployment opportunities for private credit funds have been affected by a variety of factors, including a decrease in M&A and deal-making, which in turn has reduced deal flow for private credit firms targeting M&A activity. However, while deal flow linked to M&A and leverage buyouts has fallen, direct lending has grown through access to large deals and expansion into broader markets. Calling back to our previous discussion about resilience in the private credit space, this combination of decreased leveraged loans and high-yield markets has compensated for the M&A slowdown and provided private credit lenders a way to stay resilient during the current challenges. Meanwhile, the European trend of using club deals for larger deals moves away from traditional syndicate lending.
Another factor supporting deployment is the ability of lenders to secure their preferred terms when underwriting the loan. Firms are reporting increased financial covenant protection, which remains a key tool for managers to protect the value of investor capital. Additionally, a company breaching covenant terms is not necessarily bad, as such a situation transfers power from the borrower to the lender, which allows lenders to manage risk more effectively.
While 2023 saw some turbulence in the form of the collapse of Silicon Valley Bank and the regulator-sanctioned sale of Credit Suisse to UBS, the response has been for banks to reassess their risk appetite for lending in certain markets. This shift, in combination with the upcoming implementation of Basel reforms in the US, has benefited private credit funds by creating further opportunities for them to expand their origination footprint.