Private Credit: Coronavirus to Shift Market in Profound Ways
Private credit has been one of the fastest-growing areas of the credit market since the great credit crisis ended a decade ago. As banks stepped back from small and mid-market lending, especially in riskier areas like expansion and takeovers, funds sprang up to fill the void for a price. Institutions pensions placed enormous sums of money in private credit vehicles to capture higher yield as interest rates on other fixed-income investments declined steadily.
The private credit markets have grown from just $237 billion in assets in 2008 to an estimated $812 billion today. That’s a growth rate of almost 12%. Some estimates say that 70% of small to midsize businesses are at least partially financed by private credit funds.
Private Credit and Coronavirus
Coronavirus will challenge and could reverse the rapid growth of private credit.
It is going to be a lot harder to raise money in the private credit business until we know the full impact on the economy and financial markets.
There is a real chance that pension funds, one of the biggest investors in private credit, will have to add to their equity portfolios. A significant market decline could trigger an asset allocation shift towards stocks. That would significantly reduce the amount of cash available for private credit funds.
The possibility of institutional investors, especially pension funds, becoming more risk-averse, could also limit fundraising. So will the difficulty of traveling in search of new clients.
This is also a time when looking inward at the loans they already have on the books and working with borrowers to keep the loans current is also forcing funds to spend less time trying to add assets. M&A markets are pretty much frozen right now, so there is not much demand for new lending activity at this point, either. It will take time to see what the default rate on the loans will be. During this panic, many businesses are struggling to generate cash and pay bills.
The industry has proven to be a valuable part of the financial system in the United States, but it may face a challenging year.
By: Tim Melvin
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