Volatile public markets and interest rate increases could lead more investors to boost their exposure to private credit at a time when the same economic factors are threatening to slow transaction activity in 2022 by credit managers' primary customers — private equity firms.
A drop in private equity transactions equates to fewer lending opportunities for private credit managers.
According to alternative investment consulting firm Cliffwater LLC, 75% of private credit deals are for private equity-backed companies.
Already in 2022, global private credit and private equity transactions are down from 2021 levels, despite nearly $2 trillion in private equity dry powder, data from London-based alternative investment research firm Preqin shows. The question now among managers is whether that trend will continue for the remaining three quarters.
In the first quarter, there were 201 private credit deals worldwide worth a combined $54.8 billion, down from 400 transactions with a combined transaction value of $63.3 billion at the end of the year-earlier quarter, according to Preqin. During the same period, there were 2,012 private equity transaction valued at a combined $185.4 billion at the end of the first quarter, down from 2,265 deals with a total value of $200.5 billion.
At the same time, capital is continuing to pour into the private credit asset class.
In 2021, private credit funds amassed about $190 billion, the largest fundraising year since 2017 when managers raised nearly $202 billion, according to PitchBook Data Inc.
And credit managers are continuing to have success raising new funds in 2022. On April 6, The Carlyle Group Inc. announced it held a final close of its second upper middle-market direct lending fund, Carlyle Credit Opportunities Fund II, at its $4.6 billion hard cap.
For investors, there's a lot to like about private credit. These investments often pay regular income, tend to be less volatile than liquid fixed income and much of the loans are floating rate, which can take advantage of higher interest rates.
A survey of 224 U.S. asset owners conducted in December by trade group Alternative Credit Council and data provider With Intelligence showed that 40% of all investors and 57% of public pension plans intend to increase their commitments to private credit in 2022. The reason cited by the majority of the asset owners, 55%, was to reach their target allocations, followed by 37% citing low fixed-income yields.