The global private credit market is in the midst of a sustained boom, and the asset class has emerged as a key source of funding for critical development and energy transition infrastructure globally, plugging the financing gap left by commercial banks and public sector funds.
Yet there are concerns about its resilience, given that it has yet to be adequately stress-tested, particularly in an economic downturn, noted economist and former Reserve Bank of India governor Raghuram Rajan.
According to Rajan, the growth of the asset class can be largely attributed to two factors. Large commercial banks have retreated from direct lending in the aftermath of the global financial crisis, and moved to indirect lending to private credit, which operates largely outside stringent banking regulations.
At the same time, there has been significant financial innovation within the asset class that has allowed for better allocation of risk via new structures. “The big question is, has all this innovation been stress-tested?” he said. “Regulation doesn’t reach private credit as much, and there are situations where you suddenly find either the transparency and diligence have not been great, as we saw in a couple of situations.”
Further, private credit funds tend to have less overall leverage than banks, and they lack the direct liquidity lines to central banks that traditional lenders rely on during crises. “That also needs to be tested,” Rajan said.
“Has [the asset class] been through a serious recession?” he asked, noting that the COVID-19 pandemic was not applicable, owing to the huge influx of public capital around the world that was deployed to support the economies.
“We are in a period when there’s ample credit and the [US Federal Reserve] is cutting into it, and that is the time when the risks build up more,” he said.
“This is a time to be really more careful about the risks that are playing out. It’s when lenders are free with their chequebooks that all the risks build up, and that’s the time to be a little more cautious.”
Rajan was speaking at an event in Singapore organised by Clifford Capital, the infrastructure financing specialist.
The firm, whose shareholders include Singapore state investor Temasek and the Asian Development Bank, as well as insurers Manulife and Prudential, has some $11 billion in financing commitments deployed globally across energy and utilities, transport and industrial, and digital and social infrastructure, and natural resources sectors.
Indeed, the investment requirements in emerging markets for climate change mitigation and adaptation, as well as ongoing development such as building roads and bridges, remain enormous. “The needs of developing countries and emerging markets haven’t gone away; if anything, they’ve become even more acute,” Rajan said.
Adaptation investments, which may be less immediately remunerative as Rajan noted, would need strong government support in both policy and financing. Still, investments in the space could start to generate higher returns once both technological advances and regulatory mandates kick in, and further generate.
“Emerging markets have been seeing the need for making the change,” Rajan said. “Earlier, it used to be that the emerging market was where you got policy chaos. Today, it is the developed countries where you get policy chaos. The emerging markets are increasingly seeing the need for being more stable.”
As such, the biggest infrastructure opportunities to come could be found in emerging markets with political and policy stability. Said Rajan: “I think the dearth of financing is going to push the change. As [emerging governments] see the need to attract more financing, they will themselves see the need for change.”
To that end, amid Singapore’s ambitions to be a global infrastructure financing hub, Clifford Capital expects its business to grow by about 50% from last year, group CEO Murli Maiya said in a presentation at the event. The firm, based in the city-state, provides a range of debt from senior project finance to acquisition and mezzanine financing.
About 70% of Clifford Capital’s business is in developed markets, driven by client demand. Just over a quarter of its commitments are in the energy and utilities sector. The fastest growing business segment is in digital and social infrastructure, driven by demand in data centres, though it currently comprises the smallest proportion of its commitments at about 20%.
Ultimately, there remain “tremendous opportunities” in infrastructure investment, Rajan said, pointing to the climate transition, AI expansion, post-war rebuilding in conflict areas, and development needs.
“So, huge opportunities, plenty of risks,” he added, addressing the roomful of investors. “That’s why when you look around, [and] I’m sure you’re doing this all the time, [you’re] looking for sound macro frameworks and political stability as you invest.”
