Growth of Private Credit
Private Credit has become a main player in the lending market, which used to be predominantly controlled by the banks. As seen in the chart below, assets under management have grown substantially in recent years, from $500 billion in 2012 to $1.3 trillion in 2022, as more borrowers turn to private lenders for the speed and certainty of transactions, along with institutional investors who flow into the space for the attractive yields and stable valuation that help portfolio diversification.
Will This Continue?
We believe both secular and tactical tailwinds are at play.
As banks continue to tighten their lending standards under the regulators’ watch, we expect more borrowers to engage with private lenders for their financing needs. This puts the lenders in a strong position where they can strike better terms—higher yields, tighter covenants—that can help them weather potential market turmoil. Although the momentum has somewhat normalized this year, continued investor inflows into the space should also provide them sufficient dry powder to remain competitive in the lending market. We also see more institutional asset managers building their capabilities in the space by leveraging their macro and fundamental research, as well as due diligence expertise, which should support reformation of this once niche market into the mainstream.
From a tactical standpoint, since private debt tends to be floating rate, yields continue to strengthen and are expected to remain solid. As the Federal Reserve (Fed) is expected to hold up short-term interest rates until inflation cools down to its target, this sector should continue to produce attractive yields (see below).
Overall, we expect the Private Credit sector to remain healthy. We remain neutral on bank loans and high yield corporate credit though due to valuation concerns.
Not All Private Credits Are the Same
The private credit universe is comprised of various types of strategies, leverage, duration, sectors, and capital structure focus that can generate varying degrees of performance. And the range of outcome is expected to be wider in the near future as we walk through the shaky macro backdrop. In this environment, the experience and relationship investment managers have will also play a more critical role in sourcing concrete deals and working out delinquencies/defaults and should not be overlooked.
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