Despite risks with private credit, panelists at GRI Summit highlight it's not only increasing in popularity, but the asset class also offers more benefits than cons.
Private credit has emerged as a rapidly growing asset class, reshaping how capital is allocated and the way businesses access financing. A recent panel discussion hosted by the Global Risk Institute (GRI) explored the performance of private credit, its benefits, risks, and implications for the financial system along with the advantages private credit has on institutional investors.
Panelists were quick to point out that the private credit market has gained momentum, with significant capital flows and increasing demand. Jérôme Marquis, managing director of corporate credit at CDPQ Fixed Income believes that private credit has become key for pension funds and institutional investors for three key reasons.
For one, it provides "recurring revenues" for pension funds, as they are "clipping coupons" from the investments. Secondly, private credit also offers downside protection for institutional investors, noting that “there’s advantages of private debt for a lender, there's also advantages for a borrower.” Finally, pension funds are attracted to private credit because it "pays more than if I buy public bonds in the market," said Marquis, noting the higher returns are a key draw for institutional investors seeking to boost their yields.
Despite private credit bringing opportunity to investors, there’s also risks, the panelists said. But as Marquis asserted, “you get risks everywhere.” Former Citibank CRO and executive in residence at GRI, Anthony Peccia highlighted the potential for "spillover effects" if private credit markets experience major losses, drawing parallels to the 2007-2008 financial crisis. "If this market were to experience major losses, the spillover effect on the economy could turn a mild recession into a deep one.”
Meanwhile, Christian Hensley, senior advisor at Avondale Private Capital explained how the private credit space has evolved with increasing complexity and diversification. Hensley, who has managed large private credit programs, pointed out that regulatory constraints have shifted capital away from traditional banks and into private markets.
"The overall expansion of the private market side of the equation in equity has also been a big contributing factor, as many of the corporate loans we've talked about are happening through the private equity channel,” he said. ‘There's a synergistic relationship between the expansion of that business and the success and the flows that are going into the private capital side.”
Increased collaboration between traditional banks and private credit providers was one key topic of discussion among the panelists. Marquis noted that, despite their differences, banks and private credit are not necessarily in competition. “They work hand in hand. Last year, cattle markets were closed and 80 per cent of LBOs were financed by private credit. This year, probably an all-time high, is the issuance of leverage loans in the US,” he explained.
“They're not competing [with each other]. They're complementary,” echoed Peccia. This collaboration was also echoed by John Trivieri, CRO at Meridian Credit Union.
“We work very well with them, but we can't be slow. We have to have that pinpoint expertise to make sure you can respond in time sufficiently with the data that that you have," he said. “The one thing that keeps coming to mind is when liquidity is high, people chase. When liquidity is low, then it's harder and margins go up.”
Hensley also acknowledged the misconception that private credit inherently carries higher risk, noting that what investors are getting is “much more cost effective.”
“They're saving hundreds of basis points of cost against raising equity from a possible ‘face ripping’ of private equity funds. They're getting engagement, alignment, support, due diligence and flexibility. They're willing to pay that higher premium for that enhanced experience and partnership,” he said.
As private credit continues to grow, the question of whether it poses systemic risk becomes pertinent. While the panelists had varied views on whether regulation was necessary, Peccia argued against heavy-handed regulation, stating that it would stifle the dynamism that makes private credit attractive.
"The market should not be regulated, I think it's doing fine on its own,” he said. “There is a regulated market for credits, and that's the banking sector. Some pension funds are regulated under aspects of it, but that market serves a particular need. When done right, it actually contributes to the economic growth and all the prosperity that goes along with that.”
