Alt Investments

Private Credit Matures But Yet To Face Big Recession

Tom Burroughes Group Editor May 9, 2024

Private Credit Matures But Yet To Face Big Recession

We talk to a law firm that engages in the area of private credit funds and other alternative investments about its views on this market area, which has been hot in recent years.

With all the growth this publication has noted in the world of private market investing, such as the world’s $2 trillion credit space, the sector is also maturing. Far from being stuffed with over-eager youngsters ignoring history, it contains a strong mix of Wall Street veterans. 

That’s how US law firm Barnes & Thornburg sees it. The pace of growth in private markets will continue, although the scorching pace of recent years might not be sustained.

Shams Billah, leader of the firm’s private credit team, argues that investors like the time horizons that private credit typically requires. 

“People in the private credit market are long-term holders and people like this about private credit,” he told this news service in a call. 

And running alongside, he said, is a number of private credit firms and funds that were founded by experienced Wall Street bankers. “They have the credit chops,” he said.

Players in the private credit space include Apollo – famed for its distressed debt activities – Blackstone, Oaktree Capital, Blue Owl (a relative newcomer), Golub Capital, and KKR, to name a few. Goldman Sachs is pushing into the space. In early April, the US firm’s asset management arm bought a stake in private credit specialist Kennedy Lewis Investment Management.

The attractions are clear.
More than a decade of ultra-low interest rates (until recently), tighter capital regulations on banks after the 2008 financial crash, and structural changes to finance, have sent capital flooding into private credit. Sometimes the sector is dubbed “shadow banking” – although there is nothing particularly obscure about it.

However, as this news service reported a few days ago, a few wealth management figures on the “buy side” of the desk have reservations about whether private credit, or private markets more generally, are a good fit for all clients. 

A rising generation of private credit managers will need the experience of older and possibly wiser hands around when difficulties arise, Billah said. 

“What’s yet to be seen is how will the younger generation of private credit investors handle the anticipated recession and restructuring wave forecasted by the industry,” he said. “Anyone working in private credit who is under 35 has never experienced a recession.”

The International Monetary Fund recently fired a warning flare about potential risks in the sector, although it does not – yet – see a systemic risk issue.

Private credit is big business. According to EY, in a January 2024 reported entitled Private Debt – An Expected But Uncertain “Golden Moment”?, the private credit space has surged from $280 million of assets under management to $1.5 trillion in 2022 (it cited figures from Pitchbook). Private credit makes up about 12 per cent of the global alternatives market. According to a report issued in 2021, US banks and securities firms were responsible for more than 70 per cent of the loan issuance on the primary market for corporate loans in 1994, compared with 10 per cent in 2020. As EY went on to note, research firm Preqin forecasts that private credit will nearly double in size reaching $2.8 trillion by the end of 2028.

Billah’s colleague, Scott Beal, a partner at Barnes & Thornburg, and who is private funds and asset management co-chair, thinks the private space will continue to “grow rapidly, if not at the same pace…benefits will persist despite tougher economic times.”

And this is no longer virgin territory. 

Among limited partners (clients) private credit is a very established field today, and certainly among family offices, endowments, and others, Beal said.

What about fees?

Fees in private credit, Beal said, tend to be 1.0 to 1.5 per cent for an annual management fee, and carried interest between 10 and 20 per cent, typically over a preferred return or hurdle. (By "hurdle," this typically refers to an inter-bank interest rate, such as the Secured Overnight Financing Rate (SOFR), which replaced the old LIBOR system in January 2022.) Reports say investors are pressuring funds to change hurdle rates because rising interest rates have made hurdle rates too easy to achieve.

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