From Federated Hermes’ Patrick Marshall, Head of Private Credit.
The APAC direct lending is continuing to expand. Australia has been at the forefront of this expansion in 2024, on the back of high yields due to relatively high interest rate environment. This coupled with strong deal activity has made the Australian market an attractive one for direct lenders. With interest rates expected to slowly come down in 2025, transactions volumes are expected to remain strong. With banks starting to retreat from middle market leveraged lending, there is going to more space for direct lenders to grow their market share.
As interest rates slowly fall, we expect transaction flows to increase within the direct lending segment of private credit. Meanwhile, 2025 is shaping up to be a great year for real estate debt.
The 2025 outlook for private credit remains very favourable as it continues to attract institutional investors seeking exposure to the attractive risk reward parameters on offer from this asset class.
With interest rates slowly falling, we expect transaction flow to increase within the direct lending segment of private credit. Increases in company valuations, on the back of lower interest rates will increase M&A volumes which should benefit direct lenders. Yields on loans will hold steady as the expected reductions in interest rates will be offset by higher margins on the loans as a result of the implementation of Basel IV regulations which should increase the cost of capital for many banks.
Also read: Finding Income in High Yield Bonds, Bank Loans, and Emerging Markets
This will reduce pricing competition for direct lenders. With continued geopolitical and economic risks on the horizon, in the form of weaknesses in many of the European economies and the threat of potential tariffs by the US on some European companies, the focus by investors will continue to be on low risk direct lending strategies which should be better suited to manage this uncertainty. While defaults will continue to increase in the short term on the back of high interest rate costs, we expect this to stabilise as interest rates start to fall more significantly. Conservative and disciplined lenders should enjoy a strong year in direct lending as transaction volumes increase.
Within the asset-backed lending segment, European senior secured real estate debt is currently favoured. With transaction volumes increasing, particularly in the mid-market, the market is currently offering lenders with attractive investment opportunities.
Furthermore since real estate valuations have experienced significant declines over the past couple of years, new financings are currently being structured off conservative valuations. With the real estate occupier markets remaining strong, and rents holding up well in all major markets, we expect the debt per square metre ratio to be significantly lower on new loans transactions. This coupled with the fact that the expected continued reduction in interest rates will support asset values and maintain debt affordability, leads us to believe that 2025 is shaping to be a great year for this asset class.
Both direct lending and real estate debt are set to have excellent years – however this remains a year to be disciplined and with a number of risks on the horizon, we expect the more conservative strategies to enjoy greater success.
