Private credit funds report growth in activity as other lending markets retrench

• Private credit lenders lent an estimated US$333bn during 2022, a 60% year-on-year increase
• Growth in lending spearheaded by larger firms who account for 58% of total capital deployed
• Better returns from higher interest rates come with increased stress on loan portfolios
• Proactive approach to risk management moderates the impact of higher rates

New industry research from the Alternative Credit Council (ACC), the private credit affiliate of the Alternative Investment Management Association (AIMA), estimates that private credit fund managers lent an estimated US$333 billion in 2022, up 60% on the US$200 billion lent in 2021.

The 9th edition of Financing the Economy, published in partnership with SS&C Technologies, finds that this growth is driven by private credit fund managers capitalising on opportunities created by slowdowns in the syndicated and high yield credit markets, and the expansion of asset-backed finance, real estate debt and non-sponsored lending strategies.  The research finds that this growth is led by larger private credit fund managers who accounted for an estimated 58% of capital deployed.

Private credit fund managers report significant increases in returns as floating rate loan products benefit from higher interest rates.  35% of respondents identified risks stemming from higher interest rates as the biggest challenge affecting their loan portfolios.  Initial credit selection, risk management practices and relationships with portfolio companies are predicted to be key differentiators between lenders and the returns on capital they can achieve.

The research finds that portfolio stress is largely idiosyncratic to specific firms, funds and vintages, with many challenges stemming from Covid-related shocks that are still reverberating through the economy. 53% of respondents stated they had made loan term amendments to fewer than 5% of the loans in their portfolio, and a large majority reported no or less than 5% adjustment to loan par values.

Financing the Economy also provides insights into how private credit funds are managing leverage and liquidity risks. 36% of respondents reported using no financial leverage and 51% of firms reported modest levels of between 0.1 and-1.5x financial leverage. These levels are consistent with previous ACC research, indicating that there has been no significant increase in the use of financial leverage by private credit funds.

An estimated 58% of capital managed by private credit funds is invested through closed-ended funds, with only 11% invested through open-ended structures. Investors are exploring more flexible structures to improve the efficiency of capital deployment while making extensive use of liquidity management tools such as lock-up periods, redemption windows, gates, notice periods and slow-pay structures to mitigate potential liquidity risks.

Jiří Król, Global Head of the Alternative Credit Council, said: “Private credit funds continue to be a vital source of capital and liquidity to businesses, especially at times when other markets retrench.  While a smaller group of funds now account for the bulk of corporate lending activity, funds investing in other segments continue to have an oversized impact on underserved sectors of the economy.  Our research also highlights how risks related to leverage and liquidity management continue to be well-managed. Greater transparency on these practices is vital to showing policymakers and regulators why the sector’s growth is beneficial to the economy by using investment structures and practices that enhance financial stability.”

“AIMA’s research shows the growth in private credit will continue for some time,” said Bhagesh Malde, Global Head of SS&C GlobeOp. “The industry continues to focus on innovative structures and strategies to bring liquidity to the market and deliver capital to underserved market sectors. At the same time, there is a greater drive toward transparency, which ultimately benefits the industry and investors. As a leading fund service provider in this space, SS&C is seeing the industry optimize their operational capabilities to sustainably support future growth.”

The research draws on data from 56 private credit managers and investors who collectively manage an estimated US$914 billion in private credit assets. The research also features contributions from Arcmont Asset Management, Ares, BlackRock, Blackstone, Blue Owl, Carlyle, Cheyne, Hayfin, ICG, MGG, MV Credit, Oaktree, Oak Hill Advisors, Siegfried AM, and Tikehau Capital.

Editor's note:
The estimated US$333 billion capital deployed by private credit managers in 2022 was established using data reported by private credit managers for this research and third party sources.  Using the reported capital deployment of our respondents for 2022, and the reported total private credit assets under management of our respondents, the ACC was able to extrapolate a figure for capital deployed by private credit managers in 2022 by scaling up the reported deployment by survey respondents relative to their share of the global private credit market at year end December 2022 (Preqin data)