In the first part of our 2025 private credit outlook, we offered a broad overview of the prospects for the asset class over the next 12 months. Now, we assess some sectors in a little more depth – namely infrastructure and real estate.
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In the first part of our 2025 private credit outlook, we offered a broad overview of the prospects for the asset class over the next 12 months. Now, we assess some sectors in a little more depth – namely infrastructure and real estate.
The infrastructure debt market enjoyed a buoyant 2024, with borrowers increasingly adjusting to the interest rate environment and proving less hesitant to progress with financings. Activity was dominated by three themes in 2024: Energy security, decarbonisation and digitalisation. We observed a strong pipeline of deals in sectors such as LNG/gas, renewables, power networks, data centres and fibre networks
We expect this trend to continue in 2025 and beyond, based on ongoing geopolitical tension and the sheer amount of capital required to improve infrastructure to deliver a green and digital transition.
One major uncertainty in the US is how the Trump administration potentially revises the Inflation Reduction Act ('IRA'). Most of the new projects and jobs generated by IRA subsidies so far are in Republican states, so it's possible a comprehensive repeal doesn't go ahead. It cannot be discounted, however, and our view is that lenders would be wise to stress-test opportunities for a non-IRA world.
Investor appetite in digital infrastructure is exceptionally strong with almost 100% growth in debt volume year-on-year in Europe[1]. We believe pricing is fairly attractive considering the demand. Investment-grade (IG) debt spread is in the 200bps region while the sub-investment grade (sub-IG) spread can reach 600-800bps.
The key challenge we see facing data centres is energy intensity. An emerging trend is partnerships between energy, digital infrastructure and major technology corporations to deliver (ideally clean and dispatchable) power to data centres. We believe this will create financing opportunities across the entire supply chain.
Perhaps counterintuitively, the real estate market correction has helped reduce risk of new real estate debt opportunities. Valuations are down and lenders are demanding lower loan-to-value and robust covenant protections. The downside is that sourcing longer-maturity transactions has been more difficult as majority of borrowers only want 3-5 years loan length.
The living and logistic sectors ('beds and sheds') continue to draw the biggest investor demand. In Europe, banks are very competitive and we believe better value can be found in places with less bank involvement. For example, we reviewed several large residential transactions in the Nordics where pricing was attractive as banks in the region are less willing to underwrite loans over €100m.
Less-loved sectors are also a source of good value opportunities, in our view. The office sector, for example, has suffered a collapse in sentiment since the pandemic. However, high-quality offices (prime location, strong sustainability credentials) are still very sought after.
Similarly, within the retail sector we like retail parks which benefit from more resilient occupier mix and customer footfall. We believe lending against these strong assets in less popular sectors can drive good relative value.
Defaults have been well-contained. Borrowers are keen to protect their equity and actively working with lenders to restructure the debt, often repricing to higher yields and providing additional equity or other protection. Lenders are reluctant to take over the buildings or crystallise loss on the loans, so generally happy to support the debt rolling over. Lower rates and recovering real estate market should support refinancing next year, in our view, the macro uncertainties notwithstanding.
We are optimistic about private credit's prospects in 2025. Macro uncertainty is unhelpful, and we caution against complacency, but we do not expect it to materially constrain the asset class. Falling rates and megatrends should continue to drive transaction activity, in our view, although competitive pressure is likely to be sustained. Lenders will need to use all the tools in their toolbox to find attractively priced, high credit quality opportunities.
[1] Source: Infralogic, October 2024
