Private Credit: Why Now Could Be the Right Time To Be Investing
Private Credit, also known as Private Debt, is growing rapidly, with an estimated $US1.7t in assets under management globally. This asset class has seen strong demand due to banks pulling back from riskier lending since the global financial crisis. Private Credit offers higher yields, with all-in rates for new US loans reaching around 11% by mid-2024. It also provides a flexible, tailored lending solution for borrowers that cannot access traditional loans. Although less regulated, Private Debt diversifies portfolios and is less correlated with market volatility, making it an attractive investment option.
Here a some key reasons as to why now could be the right time to explore investing in Private Credit:
The Appeal of Private Credit
The aftermath of the Silicon Valley Bank collapse in 2023 and broader tightening of lending conditions by traditional banks. This significantly boosted the demand for Private Credit. This market has grown in prominence, particularly in leveraged buyouts (LBOs), where private lenders now play a major role. Even though interest rates are expected to have peaked and might begin to ease in 2024, Private Credit remains attractive. This is due to its ability to offer tailored financing solutions for businesses that can’t rely on traditional banks. (Petiole Asset Management). (Family Office).
Private Credit is also a rapidly growing asset class. Preqin projects that the global private credit market will nearly double in size from 2022 to 2028. Their estimate has Private Credit reaching an estimated $2.8 trillion in assets under management (Petiole Asset Management). This rapid expansion is partly fuelled by the continued caution of banks, which are facing upcoming regulatory changes, such as the Basel III updates in 2025. These regulations are likely to limit bank lending and increase the burden of risky loans, pushing businesses to Private Credit markets. (Family Office).
Rising Demand and Investor Opportunities
Investing in Private Debt offers investors several advantages over traditional fixed-income investments. With bank lending constrained, many companies are seeking refinancing options or new capital to manage the debt they took on during years of lower interest rates. This creates significant opportunities for private lenders to fill the gap, providing capital where banks are pulling back. Additionally, direct lenders often face fewer regulatory constraints, allowing them to be more aggressive with leverage and deal structuring (Petiole Asset Management).
For investors, the appeal of Private Credit lies in its ability to generate higher returns compared to public markets. The uncertain economic landscape, characterised by inflation risks and the potential for continued geopolitical instability, makes Private Credit particularly attractive for those seeking yield in a low-growth environment (Family Office). Fund managers have responded by launching new Private Credit funds aimed at capturing this demand. Many have been targeting larger pools of capital and offering tailored solutions for investors (Petiole Asset Management).
Risks and Considerations
While the interest in investing in the Private Credit market is growing, it is not without risks. One significant challenge is the looming “maturity wall”. A Maturity Wall is a large volume of debt issued at low interest rates is coming due for refinancing. As companies are forced to refinance at much higher rates, some may struggle to meet their obligations. This can create both risks and opportunities for investors. Sectors like commercial real estate, which have already felt the pressure of rising borrowing costs, could present distressed investment opportunities (Family Office).
Investors should also be cautious about the broader macroeconomic environment. While Private Debt offers attractive yields, its performance can be sensitive to economic downturns, particularly if inflation remains high or geopolitical risks escalate. A selective approach, focusing on specific sectors and geographic areas, is critical to navigating the challenges of 2024. (Petiole Asset Management).
Conclusion
As traditional banks continue to face constraints, 2024 presents a promising time to consider investing in Private Credit. The combination of increased demand from businesses, regulatory pressures on banks, and the potential for attractive returns makes Private Credit a unique opportunity for investors willing to take on some additional risk. However, as with any investment, careful selection and an understanding of the broader economic landscape will be crucial for success.
This evolving sector offers compelling prospects for those looking to diversify their portfolios. This allows investors to capitalise on the structural shifts in global lending markets.
About PrivateInvest
PrivateInvest is an Australian Investment Fund Manager + Private Commercial Credit Partner / Non Bank Lender to the Property Sector providing a suite of bespoke financial services to investors and borrowers.
Wholesale Investors rely on PrivateInvest to deliver above average risk altered returns in the commercial real estate debt market. We achieve this through equity, mezzanine debt, preferred equity, and hybrid debt instruments.
Qualified borrowers in the middle market segment access capital from PrivateInvest for tailored property financing. PrivateInvest provides support and personalised solutions that borrowers “can bank on”.
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