Oct 13, 2023

Future of private credit

Been noticing alot more players joining into the private credit market. Its a little worrying knowing that as more players join it will only get more competitive with pricing and yields will most likely start to decrease. Similarly to private equity, theres only SO many good deals available. I personally think that there will be even greater need for the credit equivalent of secondaries.  Curious to hear others thoughts. 

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I will try to dissect your post and give my 2cents:

  • "More players will make pricing more competitive" and "There is only SO many good deals available": (1) PC is effectively eating market share from the banking channel as intermediary of credit. With higher cap requirements and the scars of 2022 hung LBOs still hurting, banks are losing their role and being partially replaced by PC. PC is therefore taking a larger piece of the pie so I don't see yields coming down due to competition. (2) PC is driven by capital supply (ie LPs) and these are very constrained, since private is still seen as a % of total portfolio and the denominator effect keeps the growth limited. This together with the practical timelines or raising PC funds, put a natural brake on PC growth 
  • "There will be even greater need for secondaries": A big YES. LPs need a way to create liquidity for their portfolio hence need for secondaries (PC&PE). PE secondaries is much more developed vs PC and I think the gap will be filled. However, (1) Another way to provide liquidity is NAV financing which actually is already very well developed in PC-land (and easier to provide vs NAV facility to a PE fund) so I wonder if there will be more use of fund leverage vs secondaries, and (2) remember that in PE secondaries price is at discount to NAV when raes are high, but because PC is floating-rate at current rate you would get no discount. 
 

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