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In some ways, the private credit landscape resembles conditions seen we last saw in 2021. Credit spread have tightened and syndicated markets have regaining activity in the last twelve months. Both markets are open for business with the syndicated markets recently regaining share that was ceded to private credit during 2022 and 2023. The theme that continues however is the convergence between the syndicated and private credit markets as we see deals shift fluidly between the two markets. Emerging themes also include a resurgence in junior capital deals, an increasing number of take-privates and the refinancing of capital structures with near-term maturities.

Flexibility of capital is essential in response to evolving market conditions. As syndicated markets regain momentum, private credit strategies pivot towards junior capital deals and smaller unitranches, reflecting a shift in deal structures and origination focus. As sponsors regain an appetite to look at add-on M&A, delayed draw term loans become more relevant in capital structures as well. This is where the flexibility of private credit can stand out in contrast to the syndicated market. This adaptive approach reflects our commitment to staying agile and responsive to changing market dynamics.

We see private credit as resilient amid changing dynamics. We can apply a different playbook to different market conditions. While the recovery of syndicated market may pose certain challenges, private credit remains well-positioned to capitalize on its flexibility and specialized solutions.

Interest rates moves may have a nuanced effects on credit outcomes. Higher rates may influence sentiment and execution timelines. They certainly drive up the cost of capital for sponsors evaluating new transactions and increase borrowing costs at existing portfolio companies. However, they are unlikely to significantly alter credit fundamentals for well-performing companies. Default rates have increased alongside the increase in base rates, but so have returns in the asset class. While the environment has become riskier, investors are getting paid more to bear these risks. This environment will test credit managers and it is critical to focus on credit selection when navigating these interest rate fluctuations.

The upper middle market has emerged as a preferred segment for private credit investments given its resilience and origination potential. Despite market slowdowns, opportunities abound in larger sponsor owned businesses with established track records and growth prospects. We like investing with larger businesses because we believe they are less susceptible to macroeconomic and idiosyncratic risks. However, another added benefit is that in a slower M&A environment, this segment of the market has more avenues for new investment origination activity and existing portfolio company realization opportunities.

As the private credit market continues to grow, strategic partnerships and unique origination opportunities are paramount to a manager’s success. Leveraging incumbent positions and industry expertise, private credit firms can enhance deal flow and drive value for investors. Our team has over 800+ portfolio company relationships from which we source opportunities, build sponsor relationships and garner industry expertise. In addition, we sit within one of the world’s largest global banks and source opportunities with the support of �۶���Ƶ’ vast origination channels.

Looking ahead, Kevin and the team are optimistic about the future of private credit. As M&A activity rebounds and investor interest remains strong, distinct origination and adaptive strategies will be essential for navigating evolving market dynamics and capitalizing on emerging opportunities.

Improved private equity sponsor activity supports continued private credit growth

US private equity deal count vs private credit deal count

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Source from LCD, data as of 30.06.2024