Private credit

What might private credit hold in store for investors in 2024?

05 April 2024

Duncan Richer, London UK, VP Private Markets Team; Nikhil Patel, London UK, VP Private Markets Team

This article is more technical in nature than our typical articles, and may require some background knowledge and experience in investing to understand the themes that we explore below.

All data referenced in this article are sourced from Bloomberg unless otherwise stated, and is accurate at the time of publishing.

Key points

  • The private credit market has grown rapidly since the global financial crisis, driven by strong demand from borrowers and investors seeking higher yields. With bank lending in decline in response to tighter regulations, private lenders are taking an increasing share of loan issuance.
  • These favourable supply-demand dynamics are set to continue, given the ‘maturity wall’ of leveraged loans and high-yield bonds due for repayment within the next three to five years, as well as record levels of private equity ‘dry powder’.
  • Sustained higher interest rates and a slower economic backdrop could put pressure on some borrowers, so careful due diligence, deal structuring and underwriting will be increasingly important.
  • For investors willing to accept more risks and commit for the long term, private credit offers a range of opportunities across the market cycle and the potential for attractive, risk-adjusted portfolio returns.

The private credit market has grown rapidly over the past decade or so, with assets under management (AUM) rising from $272 billion in 2007 to $1.6 trillion in 2023 (see chart), according to researcher PitchBook1. This trend is expected to continue at pace, with Preqin forecasting that private credit assets under management will nearly double in size to $2.8 billion, by the end of 20282Once a relatively niche asset class, it now represents 12% of the global alternatives market3 – and accordingly is becoming an increasing feature of investors’ private assets portfolio allocations.  

Soaring value of private credit

Growth in private credit assets under management since 2006

Soaring value of private credit

Source: PitchBook Data Inc. Data as of 30 June 2023

For much of the 20th century, lending to small- and medium-sized businesses was done almost exclusively by banks. This changed in the 2000s, especially in the aftermath of the global financial crisis (GFC), when banks significantly scaled back new and existing loans, in response to tighter regulations around capital requirements.

As the supply of financing from banks has declined, private lenders have stepped in to fill the gap (see chart). In the US, for example, private credit captured 84% of middle-market leveraged buyout (LBO) loans in the first three quarters of 20234.

Share of US middle-market LBO loan issuance, by debt type

As banks have retreated from leveraged buyout (LBO) loan issuance, direct lenders, such as private credit firms, have stepped into the breach

Share of US middle-market LBO loan issuance, by debt type

Sources: LSEG LPC, as of Q3 2023, Bain & Company Global Private Equity Report 2024, March 2024

Note: Middle market includes issuers with revenues less than $500 million and total loan package less than $500 million; direct lending includes non-syndicated facilities, including club lending.

Investor demand has also been a key driver of growth. With interest rates close to zero for more than a decade, investors have increasingly turned to private credit for additional yield. Private credit typically offers floating rates, which act as a de-facto hedge against rising interest rates. As central banks have hiked interest rates rapidly since 2022, floating-rate debt has offered investors valuable protection against inflation. 

A refresher on private credit

Private credit can provide a vital source of capital for borrowers unable to secure traditional bank lending. As terms are negotiated directly between borrower and lender, private credit offers borrowers more flexible solutions, which can be tailored to suit specific requirements, as well as greater certainty on pricing and execution compared to public markets. Private credit loans are similar to any other debt, whereby the borrower receives financing and, in return, the lender earns interest payments.

For investors, private credit offers a yield premium over public fixed income, often referred as an ‘illiquidity premium’, which is driven by the complexity associated with providing private loans. As with private assets more broadly, private credit tends to have a lower correlation to public markets, so it can improve risk-adjusted returns when included in a traditional equity-bond portfolio. 

Most debt is held to maturity, or refinanced, and with no daily pricing, returns are less volatile and driven by credit fundamentals, rather than market sentiment. However, the trade-offs include a lack of liquidity, as well as potentially higher credit and idiosyncratic risks, meaning it’s only suitable for more experienced investors. 

Supportive supply-demand dynamics

The current regulatory environment offers limited incentives for banks to extend their loan books. The final phase of Basel III – the internationally agreed banking standards developed post-the GFC – is due to be implemented in 2025 and includes tighter rules on banks’ capital requirements in relation to riskier assets. This is likely to drive further retrenchment in bank lending and create more opportunities for private credit – not only for new financing, but also where banks may look to offload existing loans from their balance sheets.   

There is also a so-called ‘maturity wall’ of leveraged loans and high-yield bonds issued at near-zero rates that are approaching their repayment dates (see chart). More than $2 trillion of US high-yield bonds and leveraged loans are due to mature in the next five years, and almost 25% of the high yield market will mature within three years5. Given the incoming banking regulations, these issuers are increasingly likely to turn to private credit for refinancing. 

The upcoming maturity wall

Leveraged loans and high yield debt that has been refinanced or is approaching its repayment date 

The upcoming maturity wall

Sources: JP Morgan, Bloomberg, as of 30 September 2023, as shown in Angelo Gordon’s Capital Markets Perspectives, Fourth Quarter 2023. 

Finally, private equity sponsors have been increasingly tapping the private credit market. Private equity dry powder (or capital already raised) reached a record $1.6 trillion in mid-2023 – more than double the $506 million of dry powder in private credit – pointing to continued strong demand for the latter6

With demand likely to outstrip supply, private lenders should be well placed to negotiate deals and take a highly selective approach. These supportive dynamics should allow the private credit market to grow further, expanding the range of deals brokered as well as the pool of potential borrowers. 

Private credit in a changing environment

After a period of rapid interest rate hikes from the major central banks, rate cuts are now back on the horizon. Depending on the type of loan, lower interest rates are likely to mean lower investment returns across public fixed income and private credit, but may also reduce duration, which in turn can speed up the return of capital to investors. 

With inflation still elevated, investors could yet be facing a ‘higher for longer’ rate scenario, and with it, the prospect of continued higher returns. However, combined with weaker macroeconomic conditions, this could put pressure on some companies to keep up with their debt repayments. Borrowers who took on high levels of debt when rates were at record lows could soon face refinancing at levels that are not sustainable.

Navigating the risks

Although private credit defaults have remained low at around 2% since 20087, managing this risk through careful due diligence, deal structuring and underwriting will be increasingly important. Lenders can build in downside protection to deals through covenants, rate floors or call premiums. 

Diversifying across strategies, vintages, sectors and geographies can also help reduce portfolio risk. As a highly flexible strategy, opportunistic credit can adapt well to a falling rate environment, as shorter holding periods allow managers to capture changes in spread and potentially generate a higher yield for investors. It may also look to gain exposure to quality companies facing temporary headwinds, or debt at attractive prices due to forced sales, for example. Distressed debt may also present more opportunities if macro conditions deteriorate.  

Long-term opportunities

Private credit is a growing asset class, benefiting from structural shifts in both supply and demand. It’s not without risks, especially in more challenging market conditions, as we could see in 2024. However, for investors willing and able to commit for the long term, it offers a range of opportunities across the market cycle. 


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