Limited and general partners at the Milken Institute‘s 2023 Global Conference are optimistic about private credit’s potential for returns, which stand to benefit from high yields, strong credit and lower competition. But a slowdown in fundraising and macroeconomic risks are tempering allocators’ enthusiasm.
“Yields in private credit are up 500 basis points,” said Tim Lyne, CEO of Antares Capital, a middle market private debt firm, on Wednesday. “2023-2024 will be one of the most attractive vintages of private credit over a long period of time.”
Rising interest rates have driven both investors and borrowers to the private side of the loan market. In 2022, the Federal Reserve’s rapid tightening cycle brought the bank-led leveraged loan market to a halt—and LBO deals along with it. In the second half of 2022, LBO-related deal volume fell 80.2% year-over-year, according to PitchBook’s 2022 Private Debt report.
Direct lenders with private debt funds moved in to fill the market gap left by banks, scooping up a portion of the LBO lending market.
“There has been a lot of demand for private credit,” said Eric Wilmes, head of private equity in the Americas for Singapore’s wealth fund GIC. “There’s been a lot of use for [private credit] to finance transactions that it hasn’t historically been used for.”
Recent turmoil at regional banks, which culminated in the collapse of First Republic on Monday, is another potential driver of business to private lenders. The event renewed pressure on other regional bank stocks like Pacwest and Western Alliance.
In the past, private debt firms faced “significant competition” from regional banks, particularly in lease financing, said Nicholas Sandler, co-founder and president of Stonebriar Commercial Finance. With these players under pressure, Sandler said demand has further shifted to private debt providers.
Institutional investors are also taking note of the opportunity.
“As an allocator, we like [private credit] a lot,” said Jase Auby, chief investment officer of the Teacher Retirement System (TRS) of Texas. “We think it’s a sweet spot.”
While TRS has no determined allocation target to private debt in its strategic allocation strategy, Auby said the $160 billion public pension plan’s investment team is considering private debt on a “relative opportunistic basis.” In order to dive deeper into the asset class, Auby said an investment would require a strong external manager who is looking closely at the balance sheets of the companies and managers they lend to.
Capital constraints
Still, some executives flagged a potential slowdown in private credit fundraising as market conditions continue to pose a challenge.
Over the past decade, private debt fundraising has been on steady incline, growing from $73.3 billion in total capital raised in 2012 to close to $250 billion in 2021, according to PitchBook’s Global Private Market Fundraising Report. When the market turned in 2022, private debt fundraising slowed, falling to $200.4 billion by the end of the year.
“So much money has been raised in private credit in the past 10 years in a pretty decent market,” Lyne said. “You will see some funds struggle to raise money the next time around.”
Katie Koch, CEO of asset manager TCW, voiced concerns about the dash to private credit. TCW’s house view about the potential outcomes of macroeconomic strife is a medium-to-hard landing. Koch said that private credit’s past success has been rooted in a much healthier macroeconomic environment over the past decade. Looking ahead, the asset class’ success will depend on the macroeconomic direction.
“We can all be geniuses in a zero-interest rate environment,” Koch said.
Learn more about our editorial standards.
