Signs indicate potential attractive vintage era for private credit.
This article was produced by Adams Street Partners as part of their valued industry partnership to Insurance Investor.
After more than a year of interest rate hikes by central banks, yields have reached compelling levels, while risk is declining as terms move in favour of lenders. All of which augurs well for private credit managers who focus on disciplined underwriting of growing companies with strong business fundamentals in resilient sectors.
In our view, there are several compelling reasons to consider increasing allocations to private credit, including:
Rising yields — The floating-rate nature of private credit means yields are rising along with interest rates, providing compelling returns compared with other fixed-income instruments and liquid debt alternatives.
Declining risk — Improving deal terms are reducing risk for well-informed, defensively minded private credit managers.
More protection — Stricter covenants, lower leverage levels, and higher equity contributions provide more protection for lenders.
Due diligence pays off — Rigorous underwriting and careful credit selection are critical differentiators when it comes to building portfolios of money-good loans in the safest parts of the capital stack.
Market shifts — Lighter deal flow from core sources is being offset by high amounts of private equity dry powder and larger businesses turning to private markets as public debt options are closed off.
In combination, rising yields and more favourable deal terms signal the potential onset of an attractive vintage for private credit investors who focus on rigorous underwriting and careful credit selection.
