UK Trends and Developments Contributed by: Fergus Wheeler, Paul Yin, Tracy Liu and Medha Vikram, Latham & Watkins
friendly in certain respects. Key differences con - tinue to revolve around debt incurrence capacity, dividend and other leakage regimes, call protec - tion and prepayment requirements, as well as the imposition of tighter controls around spon - sors’ ability to run liability management exer - cises. Private credit funds’ closer attention to downside risk is off-set by the flexibility offered to sponsors and companies through creative capital solutions and the ability to offer payment in kind (PIK) interest structures. Future deployment trends One of the many benefits the private credit industry offers to companies is the ability to offer flexible financing all across the capital structure. We have seen an increase in the popularity of junior financing and hybrid capital solutions, such as Holdco PIK financing and private credit funds offering preferred equity solutions as part of their multi-strategy investment mandate. While PIK financing may not be appropriate for every business and is often sector-specific, it offers sponsors and companies the advantage of maintaining greater cash liquidity within their operating businesses. This liquidity can be cru - cial for businesses planning to expand through acquisitions or, as has been particularly relevant recently, for those preferring to retain more cash on their balance sheets for debt servicing due to the higher interest rate environment. Similarly, with the reopening of the broadly syn - dicated markets throughout 2024, companies are seeking favourable ratings on their senior debt issuances. Private credit funds have been able to provide preferred equity investments and hybrid instruments in lieu of debt, satisfying rat - ings criteria. We see this trend continuing into 2025 and beyond and a number of large private
credit asset managers have raised substantial junior capital funds for this purpose. As competition in the leveraged finance space increases for credit funds, we have seen a recent increase in diversification of investment mandates towards other areas of finance which were formerly the preserve of more specialist lenders. Areas of increased attention from pri - vate credit include infrastructure and project financings as well as asset-based lending, both of which increased substantially in 2024. We expect this trend to continue as private credit seeks to expand its horizons beyond the lever - aged finance landscape. For borrowers, private credit provides advantag - es that traditional bank loans do not, including flexible repayment terms, fewer covenants and quicker loan processing times. In a competi - tive financing environment, private credit allows businesses to tailor loan structures that better meet their strategic needs, making it an appeal - ing option for companies involved in mergers and acquisitions, restructurings or growth initia - tives. Regulatory change Regulatory developments will continue to shape the private credit landscape. While the regulato - ry environment for private credit is generally less stringent than for traditional banks, governments and regulatory bodies may introduce new rules to address concerns around financial stability, systemic risk and transparency. While private credit funds are not deposit-taking institutions, as they expand their sources of capital into high net worth individuals and family offices, this is likely to attract more scrutiny from regulators as the private credit market matures.
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