Credit investments expert acknowledges 'there is a paradigm shift happening right now'
The surge in private credit continues, with institutional investors dominating the debt market in 2024, taking a larger share from banks. Although challenges loom, such as rising costs impacting borrowers, the trend remains strong, according to a report by The Globe and Mail.
Amid a decline in private equity and real estate deals, investors have turned their attention to private credit. Global private debt assets under management have surged over 50 percent, surpassing $1.6 trillion in 2023. Projections from investment data company Preqin estimate a further increase to $2.8 trillion by 2028, with an 11 percent compound annual growth rate.
Coined as a “golden age” for private credit by investors and analysts, the shift is evident due to tighter regulations, higher capital requirements, and liquidity constraints faced by many banks, particularly in the United Stations. Andrew Edgell, global head of credit investments at CPP Investments, notes the ongoing paradigm shift.
“We’re in this transition phase. I’m not sure anyone knows exactly where it’s all going to land, but there is a paradigm shift happening right now. Credit risk is going to sit in different places than it did historically,” Edgell says.
However, challenges emerge as heightened competition among private lenders and decreasing lending rates impact the lucrative nature of private loans. An upcoming wave of maturing loans requiring refinancing adds to the complexity.
Rating agency Fitch predicts an increase in private credit defaults, and some private debt funds in Canada limit redemptions due to cash shortages. Nayef Perry, head of direct credit at Hamilton Lane, acknowledges the “double-edged sword” of better yield for investors.
“On the one hand, we’re getting better yield as investors, but on the other hand, it is slowing growth in the economy and it’s slowing growth at the company level because companies are having to use that excess cash flow for debt service. And they don’t have excess capital for capital expenditures and growth as a result,” says Perry.
In the past two years, private lenders gained traction as benchmark interest rates, such as the secured overnight financing rate (SOFR), rose from near zero to 5.3 percent. The sudden liquidity dry up after Silicon Valley Bank's collapse further accelerated private lenders' market presence.
For now, private credit prospects appear attractive, with CPP Investments aiming to nearly double its credit portfolio by 2029. However, tightening conditions, signaled by central banks hinting at rate cuts, are affecting private loan spreads. “All of a sudden, even the private lenders are competing over price, and even the covenants start to go as well. It is a competitive market,” Edgell says.
Jonathan Gray, president and COO of Blackstone Group, emphasizes discipline in the private debt market, highlighting a split among companies based on responsible debt management and the ability to pass rising costs to consumers.
Despite challenges, Edgell remains optimistic. “We’re definitely going through a default cycle. And we’ve got things we’re paying closer attention to in our portfolio. But we’re actually really benefiting right now from underwriting and putting a lot of resilient positions on the book. We aren’t seeing as much stress as you might think and cash flows are holding up,” he says.
According to Edgell, the private credit market is expected to continue to “grow dramatically.”
