Going Private: A Look at Private Credit

If you’re C-Suite and you need money to finance your development (or anything else for that matter) you have three options: head to your bank for a loan, issue bonds / stock or, what we’re hearing lots about at the moment, go private.

Private credit is shaping up to be the second-fastest growing alternative, hitting a value of $1.46tn in 2025.

It’s top of mind for a lot of investors at the moment as, due to the high interest rate, high inflationary environment we’re in, it has the potential to deliver increasingly attractive returns. Currently, data giant Preqin, are predicting this asset class to be the second-fastest growing alternative hitting a value of $1.46tn in 2025.

Global private equity firm Carlyle Group see private credit as a key feature of the market moving forward as it helps to resolve the repricing between credit and equity.? It enables direct lenders to respond to diminished competition by “subtly de-risking their portfolios and expanding into territory vacated by regional banks.” Blackstone had been repeatedly heard to say this is a ‘golden moment for private credit.’

With macroeconomic uncertainty unlikely to dissipate in the near-term, the next year is likely to see a continuation of private lenders entering and bolstering the market due to the relative strengths of their liability structures and focused business models. Blackstone seems well position to deliver good returns to their investors by their cautiously optimistic approach, with the majority of their BCRED portfolio tied up in senior debt, thus less exposed to certain risk factors.

So, where is the risk?

"As interest rates rise, certain borrowers will struggle to repay..."

Private credit loans generally have floating interest rates. This means that investors get paid more as the rates rise (hence why it’s proving to be such an attractive asset class at the moment). However, as interest rates rise, certain borrowers will struggle to repay, perhaps with certain payments coming close to double their original value. This hugely increases the risk of defaults, especially if the borrow is in turn reinvesting that money into a struggling asset class, like certain sectors of real estate. Over the last few months in the US we have seen increasing defaults on office buildings with a wave of refinancings not quite hitting the market in Europe (yet?). However, it’s worth mention that Bloomberg report that “regulators say that they don’t think the sector is “systematically risky”—but they also admit that they “don’t have much visibility.””

Overall we can expect opportunistic lenders to remain a key feature of the market moving forward and, depending on how many more hikes the Fed and BofE have in store. Private Credit’s position will only improve. The more I read on this the more I’m with Blackstone. Private credit is indeed experiencing a golden moment.

Sources: Blackstone, Bloomberg, Carlyle Group, Financial Times

This article is not personal advice. It is personal opinion and should be treated as such.