Private Credit’s Rise: You Ain’t Seen Nothin’ Yet

Private credit is just getting warmed up. Noting that private credit funds have “blossomed” due to the retreat of traditional banks from lending after the global financial crisis of 2008 and 2009, consulting firm Oliver Wyman sees even greater expansion ahead.

This is the firm’s No. 1 prediction in its list, “10 Ideas for Asset Management in 2024.” It focuses on new international bank regulations, known as Basel III Endgame and due to take effect in July 2025. These regs are intended to bolster big lenders’ stability through tighter credit risks rules and bigger capital requirements. The accord has stirred controversy on Wall Street, however, where critics say the mandates for banks to hold more capital to offset potential risks are too stringent and unnecessary.

Regardless, the Oliver Wyman report found that the Basel plan would make private lenders even more successful. As a result, the firm concluded that the “golden age of private credit keeps shining.” The paper predicted that private credit funds will expand “beyond leveraged finance into broader corporate lending and asset-backed finance.”

The larger players will be the biggest beneficiaries of the trend toward greater use of private credit, Wyman suggested, because they have the “operational scale required to compete, as speed and certainty of execution, larger deal size and ability [will] bring more value to partnerships.”

In a commentary, J.P. Morgan Private Bank argued that “ rapid growth of private credit assets under management suggests exuberance.” But the analysis discovered that this enthusiasm is not getting out of hand and loading extra debt onto the financial system: “Direct lending is not adding meaningful corporate leverage overall, but taking market share from other loan sources.”

No one doubts that this asset class is lucrative. Consider the $48 billion Blackstone Private Credit fund, known as BCred, targeting wealthy individuals and tracking the firm’s institutional fund. Three years since its inception, BCred has an annualized total return of 9.8% and a current yield of 10.5%.

A big reason for private credit’s popularity is how well the funds held up in 2022, when both stocks and bonds fell sharply. Private debt funds returned 4.2% in 2022, compared with declines of 18% for the S&P 500 index and 15.7% for investment-grade corporate bonds, according to PitchBook.

In a Moody’s analysis, a hypothetical scenario found that private credit had a material increase in tail losses, but can offer growth and improve a portfolio’s risk-adjusted returns, suggesting that the endeavor was worthwhile.

Not everyone is entranced by private credit’s allure: Caution is rising among some investors in the field. Christopher Ailman, CIO of the California State Teachers’ Retirement System, told Bloomberg recently that the pension plan’s 3% stake in private debt will grow only slowly, as interest rates are coming down—the advantage of private credit is that it tends to pay higher than many other kinds of debt. CalSTRS has been invested in private debt since at least 2010.

Additionally, Richard Daskin of RSD Advisors told Barron’s he is wary of private credit because investors might not be able to get their money out in a downturn.

Other predictions in the Wyman report include stepped-up acquisitions of insurers by private equity and other alternative asset managers; a huge opportunity for asset management in Japan as Tokyo loosens restrictions on starting new investment funds; and that asset managers will hatch fresh, innovative ways to develop new strategies, using artificial intelligence, that meet modern needs.