Private credit

Not to be confused with Private banking.

Private credit is an asset defined by non-bank lending where the debt is not issued or traded on the public markets. "Private credit" can also be referred to as "direct lending" or "private lending". It is a subset of "alternative credit". Estimations of the global private credit industry's size vary; as of April 2024, the International Monetary Fund claims it is just over $2 trillion,[1] while JPMorgan claims it to be $3.14 trillion.[2]

The private credit market has shifted away from banks in recent decades. In 1994, U.S. bank underwriting covered over 70 percent of middle market loans.[3] By 2020, U.S. banks issued/held around 10 percent of middle market loans.[4] Direct lending market expanded rapidly in the wake of the 2008 financial crises when the SEC tightened restrictions and capital requirements on public banks. As banks decreased their lending activity, nonbank lenders took their place to address the continued demand for debt financing from corporate borrowers.[5]

Private credit has been one of the fastest-growing asset classes.[6] By 2017, private debt fundraising exceeded $100B.[7] One factor for the rapid growth has been investor demand. As of 2018, returns were averaging 8.1% IRR across all private credit strategies with some strategies yielding as high as 14% IRR.[8] At the same time, supply increased as companies turned to non-bank lenders after the 2007–2008 financial crisis due to stricter lending requirements.[9] Private credit investment rose in emerging and developing markets by 89% to US$10.8 billion in 2022.[10]

One recent trend has been the rise of covenant-lite loans (which is also an issue for publicly traded investment grade and high yield debt).[11] This has been driven by investor demand for the relatively high yield compared to alternatives and a willingness to accept less protections. This has resulted in fewer company restrictions and fewer investors' rights if the company struggles. That being said, for the investment firms, covenant-lite loans can also be helpful because of the negative optics if a portfolio company goes into default, and fewer restrictions means fewer ways a company can go into default.[12]

  1. ^ Cohen, Charles; Ferreira, Caio; Natalucci, Fabio; Sugimoto, Nobuyasu (2024-04-08). "Fast-Growing $2 Trillion Private Credit Market Warrants Closer Watch". IMF. Retrieved 2024-04-18.
  2. ^ Wigglesworth, Robin (April 17, 2024). "Private credit is even larger than you think". Financial Times. Retrieved 2024-04-18.
  3. ^ "The Banking Crises of the 1980s and Early 1990s: Summary and Implications" (PDF). www.fdic.gov. Retrieved 2020-07-30.
  4. ^ "Are There Competitive Concerns in "Middle Market" Lending?". Fed Notes. 10 August 2020.
  5. ^ Chernenko, Sergey; Erel, Isil (7 September 2018). Nonbank Lending (PDF). FDIC Center for Financial Research.
  6. ^ Nesbitt, Stephen (29 November 2022). "Private Credit".
  7. ^ Flanagan, Alan (2018). "Private Debt: The Rise of an Asset Class". BNY Mellon.
  8. ^ Munday, Shawn (May 7, 2018). "Performance of Private Credit Funds: A First Look" (PDF). University of North Carolina Institute for Private Capital. Retrieved October 9, 2019.
  9. ^ George, Hannah (March 6, 2019). "Who Needs a Bank? Why Direct Lending is Surging". The Washington Post. Archived from the original on March 6, 2019.
  10. ^ Elisei, Chiara (2023-02-22). "Private credit investments surged 89% in 2022". Reuters. Retrieved 2023-12-31.
  11. ^ "Risky loans spell trouble for the future - Private Equity News". www.penews.com. Retrieved 2020-07-30.
  12. ^ Becker, Bo; Ivashina, Victoria (1 March 2016). "Covenant-Light Contracts and Creditor Coordination" (PDF). Swedish House of Finance, Institute for Financial Research. {{cite journal}}: Cite journal requires |journal= (help)