Private Credit Outlook: Evolution And Opportunity

Matejmo Private credit has experienced significant growth over the past decade, becoming a crucial component of diversified investment portfolios. In 2024, it is expected to become even more important as banks become more reluctant to lend, creating opportunities for investors. However, a potential economic slowdown may put pressure on borrowers, emphasizing the need for skilled managers to navigate credit risk. Additionally, with US inflation likely peaking and eurozone prices returning to target, there will likely be increased capital-market activity and private transaction volume. This presents a rewarding opportunity for private credit investors. Across various private credit asset classes, such as corporate lending, commercial real estate, energy transition, and consumer finance, there are opportunities that span the risk-return spectrum. Investor allocations to private credit are increasing, with total assets expected to reach $2.3 trillion by 2027. As banks reduce lending and comply with updated Basel III regulations, private lenders have the opportunity to partner with banks and acquire discounted loans or enter risk-sharing agreements. However, the macro backdrop in 2024 may bring challenges, as central bank interest rates remain high. A soft landing is expected, but even a gentle turn in the credit cycle can increase stress for borrowers, highlighting the importance of managers’ ability to underwrite, structure, and price credit risk effectively. Despite these challenges, private credit transactions offer the advantage of direct origination, negotiation, and structure, allowing proactive engagement with borrowers to work around potential problems. Moving forward, asset-backed lending strategies, also known as “specialty finance,” may gain more attention in private asset allocations, offering strong return potential and diversification. Direct lending remains a key component of private credit and offers attractive yield over public corporate credit. In the commercial real estate market, increased rate stability may lead to higher transaction volumes and price discovery. Private lenders who have remained patient and well-capitalized may find opportunities with maturing loans held by banks. Private lenders also continue to drive financing for renewable energy projects, with opportunities arising from the repricing of long-dated infrastructure assets. Despite a potential slowdown in economic growth, yields are likely to remain above pre-pandemic levels, making 2024 a favorable time to invest capital.



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