With private asset performance data for the third quarter of 2023 being released, the private credit industry continues a multi-quarter run of outperforming private equity – its first such run since the 2008 global financial crisis.
The $1.7 trillion industry returned 1.8% in that quarter, compared to 0.06% for private equity overall, based on numbers from the State Street Private Equity Index. Buyout funds fared slightly better at 0.35% but still lagged private credit.
With interest rates still high and valuation multiples contracting, the results for private debt funds have remained much steadier, allowing the industry to further entrench itself as a critical part of asset allocations.
“With tightening bank regulations and less market liquidity, particularly in certain sectors, private credit has stepped in to fill the void,” says CEO Arif Bhalwani of Toronto-based Third Eye Capital. “Some call it a ‘golden age’ for the industry, which indicates the unique position and opportunities that firms like ours are enjoying in the current financial landscape.”
For fund managers like Arif Bhalwani, the growing adoption of private debt by companies being turned away from traditional financing sources is a chance to show their unique benefits.
“For our team at Third Eye Capital, the increased opportunities aren’t merely about extending credit,” says Bhalwani. “We’re creating partnerships with businesses that are in a state of transition, offering flexible, bespoke captital solutions that are often beyond the scope of traditional banking.”
Because of widespread economic woes, many industries have experienced declining credit fundamentals, causing them to seek alternative financing solutions. For private credit firms willing to undertake rigorous due diligence, these industries are fertile ground for crafting deals that give struggling businesses an edge.
With interest rates expected to stay higher for longer, private credit will enter a new phase of evolution. Lower leverage and higher asset or cash flow coverage will provide a measure of protection against future increases. With its expertise in risk management and proven models of collaboration with borrowers, the demand for private creditshould continue to increase.
For investors in the asset class, private credit has proved its resilience through the current cycle of rising rates.
“The sector’s growth is fueled by investors recognizing the return and diversification benefits of allocating to this asset class,” continues Bhalwani. “Our ability to structure deals with covenants, collateral and tailored economic terms provides a level of protection and potential for value creation, making it a compelling option for investors.”
Founder Dinis Guarda
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