Sanlam Investments on the evolution of private debt

The private credit market has experienced significant growth globally, exceeding $1 trillion in outstanding allocations post the 2008 financial crisis. This expansion has been primarily driven by traditional lenders, such as banks, pulling back from risky lending practices due to increased regulation. To delve deeper into the evolution of the private credit market, CNBC Africa spoke with Sanan Pillay, Portfolio Manager at Sanlam Investments. Sanan Pillay explained that following the 2008 global financial crisis, regulators imposed stringent regulations through the Basel reforms, restricting banks from engaging in high-risk lending. As a result, businesses that previously relied on banks for debt financing had to seek alternative sources. This shift created a demand for private debt firms, which stepped in to provide financing tailored to the needs of these businesses. Moreover, skilled professionals from the banking sector transitioned to the private debt space, further fueling its growth. In South Africa, similar banking reforms under the Basel regulations prompted local banks to withdraw from risky lending, mirroring trends seen in the United States and Europe. South African businesses consequently turned to the private debt industry to address their financing requirements. Although the private debt market in South Africa has been expanding at a slower pace than its offshore counterparts, it has played a crucial role in supplying the necessary capital. Despite the allure of higher returns in the private credit market compared to public markets, investors must be wary of associated risks. Pillay emphasized that the increased returns stem from elevated risk levels due to the sector's limited regulation and illiquidity. Consequently, investors must possess a high level of expertise to navigate the nuances of private credit investments effectively. Pillay recommended that novice investors partner with established firms like Sanlam Investments to access their knowledge and experience in managing private debt funds. He underscored the importance of understanding the legal intricacies and nuances of private debt investments, advising investors to align their goals, investment horizon, and liquidity requirements before venturing into the space. While private debt offers attractive returns, investors must exercise caution and conduct thorough due diligence before committing capital. In conclusion, Pillay highlighted the need for continuous education and dialogue to bridge information gaps surrounding private debt investments. As the private credit market continues to evolve, investors must remain vigilant and seek expert guidance to navigate the complexities of this alternative investment avenue.