PitchBook recently published global private markets report puts some numbers against warnings about a potential bubble bursting in private credit.
Private credit assets under management now stand at around US$2.5 trillion, according to the report, a near fivefold increase in ten years. But private asset managers are unlikely to have grown their skills and capabilities to match the growth. And that might have stored up considerable problems to come.
According to PItchBook, higher redemptions and weaker sentiment are likely to temper growth in the first half of this year until investors can better size risks and refocus on underlying credit fundamentals. That sounds suspiciously like an asset class outgrowing its practitioners’ competence.
Another problem from the mountainous assets might be slowing returns from saturating opportunities and growing competition.
The PItchBook report says private credit returns have depressed after several years of “unusually favourable conditions”.
Global rate cuts and historically tight credit spreads squeezed rolling one-year internal rates of return to 3.9% over the first half of 2005, which PitchBook says is the weakest reading since 2020 and well below longer-term averages.
Meanwhile, Morgan Stanley has warned that private credit direct lending default rates could rise fourfold to 8% from historical averages of 2%-2.5%. At risk sectors, such as software and IT firms under pressure from artificial intelligence, could be even more vulnerable.
According to PitchBook, as much as one-fifth by fair value of all investments by US-focused business development companies — a type of closed-end vehicle lending to mid-market companies — are to software companies. That’s a pretty heavy level of exposure to a vulnerable sector.
The sales pitch that private credit is somehow a zero-loss proposition looks increasingly questionable.
Investors now appear to be reacting. Bloomberg reported on March 24 that Ares Management has capped withdrawals from its $22.7 billion Ares Strategic Income Fund at 5% after investors sought to withdraw some 11.6% of the fund.
Whether the withdrawals and sectoral overexposure amount to an actual financial crisis remains to be seen. But investors in the asset class had best be prudent.
