Four Investing Insights for the Private Credit Industry

Private credit has emerged as a compelling option for investors. With banks continuing to pull back due to government regulation and a changed risk landscape (among other things), a significant opportunity presents itself for private credit.

1. Retreating banks are just part of the tailwinds making private credit a compelling option for investors:

These converging trends include:

• A better opportunity set as bigger organizations that had previously looked to bank lending now see the performance of private credit and the move up market by asset managers in private credit;
• More favorable terms to private credit providers as deal terms have evolved to reflect the current interest rate and risk environment;
• These more favorable terms lead to better returns, which attract investment;
• And as the 500+ attendees at this year’s Permanent & Private Capital Summit (PPCS) show, private credit is no longer a niche asset class.

2. Deal volume isn’t a one-size-fits-all phenomenon:

While most agree that there is a current ‘deal drought,’ it exists within just one ‘flavor’ of deals – the traditional cash flow LBO financing market. In good times with easy money, it was possible to take a more one-size-fits-all approach, so people were happy to have that single approach, but as things have gotten more complex, more thoughtful and bespoke deals need to be built.

3. Managing workouts and defaults is all part of the process:

Defaults will happen, but the important thing is for creditors to have a seat at the table. Before a full-scale workout, it can sometimes be possible to get things back on track with changes to the loan terms, a credit adjustment, an intervention in a business plan or even a change in management. We are in the midst of a default cycle, but private credit will continue to show its ability to manage through a cycle.

When it comes to understanding success in a market like this, credit is not about scoring wins, but about avoiding losses – that means managing liabilities closely, underwriting carefully and sometimes having the discipline to walk away. That means being able to see that the best investment decisions are sometimes the investments you choose not to make. The reasons managers fail are operational mismanagement and liability mismanagement – if they can avoid those pitfalls, managers will emerge from this market bigger.

4. Despite uncertainty, private credit is on track to keep growing:

The private credit industry is on track to outpace more traditional sectors (e.g., high yield) and people expect that to continue, both in terms of overall volume but also market share. Ultimately the benefit of private credit is the closer relationship between lender and borrower that isn’t possible in other types of financing. This translates to the kind of individualized solutions that can help customers navigate these times.

This article is based on insights shared during a panel discussion at the 2023 Permanent & Private Capital Summit. Speakers on The Investing Landscape panel included: Joel Holsinger, Partner, Portfolio Manager and Co-Head of Alternative Credit, Ares Management; Grishma Parekh, Managing Director, HPS Investment Partners; Christine Pope, Managing Director, Oaktree Capital; and Daniel Wolf, Chief Executive Officer, Cerberus Business Finance, LLC. The panel was moderated by Jay Alicandri, Partner, Dechert LLP and Patrick Frisch, Managing Director, ING.