Private Credit
“As fewer companies have gone public in recent years, the number of private companies has grown commensurately, providing a larger pool of private firms looking for access to capital.”Explore our funds— CNBC, Demystifying Private Credit, June 21, 2023*
Strategy Overview
When companies borrow money, they have historically relied on banks. While large corporations have no problem securing loans from big banks, or selling publicly traded bonds to raise capital, there is a large population of middle-market companies that are forced to look to Private Credit solutions.
By definition, U.S. middle-market companies have between $100 million and $3 billion in annual revenue (and between 100 and 2500 employees). There are over 200,000 companies in the United States that fit this middle-market category.
Today, the Private Credit industry is managing over $1.5 trillion and is expected to grow to over $2.3 trillion by 2027. Let’s explore the 3 pillars of Private Credit that make it an attractive strategy to consider as part of a diversified portfolio.
The 3 Pillars of Private Credit
1. Historically Higher Rates of Return
Private credit offers substantially higher rates of return for investors and has proven its ability to do so in both low and high interest rate environments. From 2015 to 2021, when interest rates were at historic lows, private credit generated double-digit returns for its investors.
2. Less Interest Rate Risk
When interest rates rise, the prices of bonds fall. This dynamic doesn’t apply to Private Credit. This is because loans made to private companies usually have floating rates that adjust with market rates. So when interest rates rise, so do the payments made by the borrowing company (to the investor).
3. Historical Consistent Performance
Private Credit portfolios have proven that they can weather storms quite well. In the eighteen-year period from June of 2004 through June of 2022, which included both the Global Financial Crisis and the COVID pandemic, loss rates for private credit loans averaged around -1 percent of loans per year.
Highlights
- As of 2023, average yields for investors remain in the double digits.
- Between 1998 and 2018, the worst five-year period for private credit still produced positive returns for investors.
- Today, the Private Credit industry is managing over $1.5 trillion and is expected to grow to over $2.3 trillion by 2027.
