Mr. Acito added that some of this trend has its roots in what happened with private credit during the pandemic. Many allocators paused new investments, hoping instead to find distressed discounts that didn't really materialize. Private credit fund performance during that time, however, did show resiliency and there was an uptick in demand for financing from these funds as companies and private equity fund managers sought liquidity that wasn't readily available in the traditional syndicated loan market. As a result, allocators now have a better sense of how these funds hold up when financial markets are under pressure, he said.
The majority of the activity in direct lending happens in the midmarket across sectors. Transaction activity has been relatively consistent across, but Ken Kencel, New York-based president and CEO of $39 billion Churchill Asset Management, the credit investing affiliate of Nuveen, said that countercyclical industries like health care and business services are well positioned to ride out current volatility.
"Broadly, companies and sponsors are in a strong financial position — balance sheets look good. We've adopted a more conservative profile and prefer transactions with durable businesses," he said. "Our overall deal flow remains strong and even with that conservative posture we're still looking at yields in the 8-9% range."
John Kline, New York-based managing director at investment firm New Mountain Capital, agrees. "There are structural factors to private credit that have significant benefits. Our basis has gone up, our origination fees are higher, we have less duration risk, and we aren't seeing the same volatility as the syndicated loan market," he said.
New Mountain, with assets under management of $37 billion, is also looking at countercyclical industries like health care, life sciences and business services but stresses there is a broad-based opportunity set.
"You have a lot of discretion in private credit in terms of the opportunities, it's not like a mutual fund where you have to build out an index and take the pain if one sector goes down. We're looking company by company and making sure we're comfortable with the business from a risk standpoint." The result, he said, is a portfolio with a quality tilt that isn't as sensitive to broad market moves.
Looking ahead, Churchill's Mr. Kencel noted that as more money comes into private credit, direct lenders are able to underwrite larger loans, which expands the opportunity set for allocators and fund managers.
"Private credit is continuing to take share from the syndicated loan market as it matures," he said. "There is greater certainty around whether a deal will close, transactions happen faster, and there is more flexibility around how liquidity solutions are provided. That has appeal for private equity sponsors and companies and it leads to better long-term performance for private credit funds."
Gapstow's Mr. Acito added that for investors that have already been in the private credit space, they're taking a closer look at other asset classes within private credit. "Investors want a diversified exposure, so they are looking at things like real estate debt, asset-backed lending, other forms of alternative credit that can come alongside a direct lending fund, fill out a portfolio and offer some measure of protection against inflation," he said.