Special Report: How Scary Forecasts Private Credit Has Come A Winner
Abandoned by large commercial banks after the 2008-09 financial crisis, small businesses turned to private lenders for funding. There were many doubts that these non-bank loans, which unlike traditional bankers have no federal support, would collapse in the next recession.
This has not happened to the asset class. And many institutional investors who have since added private debt to their portfolios are reaping the rewards. Not a blast, but Tesla-style gains, sure, but solid, single-digit numbers in a time of low interest, some reaching weak teens.
Private debt funds tend to pay about 2 percentage points more than the yield on investment grade corporate bonds. No wonder investors, annoyed by low yields on fixed income, have crammed into space.
A very happy investor, for example, is the amount of $ 42 billion Arizona State Pension System, which last year had 15% of its portfolio dedicated to private debt. The results were quite correct, with a gain of 4% over one year, against minus 6.9% for its benchmark, the S&P LSTA / Leveraged Loan Index, and 9.3% per year over five years, against 3 , 4% for the bogey.
And in October, the California State Teachers Retirement System (CalSTRS) announced a $ 1 billion investment in direct lending company Owl Rock Capital.
Private credit “is well diversified across industries, geography, and strategy, with loans experiencing little credit loss,” said Al Alaimo, senior portfolio manager for the Arizona program, in a statement.
the concept has been around since the 1950s, and it accelerated until the financial crisis, when it was crushed along with everything else. With the banks retreating, however, private debt regained its mojo, and more.
Assets under management of private debt funds soared to $ 850 billion globally last year, from less than $ 200 billion in 2007, according to statistics from research firm Preqin. Fundraising fell last year, but the funds still have nearly $ 300 billion in uninvested capital.
Certainly, some private enterprises financed by credit have failed. Like the British department store chain Debenhams, founded in 1778. The company’s private lenders eventually took ownership in April. The retailer ultimately said it was going to go into liquidation.
As last year’s economic storm clouds gathered, the forecast was dire for private debt. During the initial wave of the pandemic in May, the Moody’s Investors Service rating agency predicted private loan default rates to be between 11% and 21% in 2020.
What actually happened was much less dramatic. The private credit default rate climbed to 8.1% in the virus-scared second quarter of 2020, an increase of 2 percentage points from the first period, according to an index managed by a law firm. Proskauer Rose. By the third quarter, the rate had fallen to just 4.2%.
It is so far difficult to obtain figures on how investments in private debt have performed overall. Like private equity (PE) funds, they make investments whose results may not be known for many years. “Private debt is neither visible nor traceable,” said Jason Brady, CEO of Thornburg Investment Management.
Many funds do not need to adjust the valuation of their holdings, as long as borrowers continue to pay interest. This is different from banks, which must recalibrate the value of their loan books in light of changing economic conditions and their perception of borrowers’ ability to repay loans.
Private credit is benefiting from the number of deep-pocketed players who have entered the field, including Wall Street investment banks and private equity firms. The most important are heavyweights such as Ares, Apollo, Bain, Blackstone, KKR and Goldman Sachs.
Taking a look at large-scale investments, Blackstone closed down the largest real estate debt fund in history ($ 8 billion) last fall, part of which was reserved for private transactions. On the smaller side, various family offices have loaned money to Pizza Hut franchises.
With such a tasty investment, in an era of low interest rates, the appeal is obvious.