Danger of defaults looms larger for private credit funds
It should come as no surprise that private credit has ballooned as an asset class over the past 20 years. A market with as many monikers as it has — five and counting — clearly always had the scope to get bigger.
Whether known as private debt, non-bank lending, alternative lending, shadow lending, or private credit, the investment class has witnessed eye-popping growth in the space of two decades.
As other asset classes shrank during the global financial crisis, private credit took off. Banks battened down the hatches and reined in their lending to smaller and riskier borrowers, creating a funding gap that non-bank lenders readily stepped in to fill.
Central banks around the world are now battling to fight inflation. The US Federal Reserve pushed up interest rates to their highest levels in almost 15 years at the end of September, while the Bank of England was forced to announce it would “not hesitate” to increase rates further after markets reacted badly to UK plans to cut taxes, many of which have since been reversed.
And, with German inflation running at just under 11 per cent, the European Central Bank raised interest rates by an unprecedented 75 basis points at the beginning of last month. In a statement, the ECB said that, “over the next several meetings”, it expects to hike rates further.
“A rising rate environment is new territory for many investors, who have grown used to falling and rock-bottom interest rates,” says Tamsin Coleman, a private debt specialist at consultancy Mercer.
She believes investors and managers of private debt funds will have to work hard to navigate the impact of rising rates, even though private debt is a floating-rate asset class that offers some protection from inflation.
Kirsten Bode, co-head of pan-European private debt at asset manager Muzinich & Co, agrees. “After a long period of abnormally low default rates, it is very possible that default rates will increase,” she says.
This story originally appeared on: Financial Times - Author:Chris Newlands
