Private credit is set to grow to $2.8 trillion by 2028 from $1.7 trillion currently, according to data from Preqin, and two portfolio managers in private credit believe there will be increased interest from institutional investors in the asset class.
That's due in part to banks retreating from private credit lending.
“Go back to 2013, and roughly 70% of sponsored middle-market transactions were financed by banks,” said Shundrawn Thomas, founder and managing parter at the Copia Group, on a Pensions & Investments LinkedIn Live event April 17.
“That’s down 11% last year, so you can appreciate the shift” away from banks to private credit lenders, he said.
"There are more eyes on private credit, but it’s not new. it’s been going on for decades,” said Thomas, who prior to founding Copia in 2022 was president of Northern Trust Asset Management, a global investment manager with $1.3 trillion in assets under management at the time.
Private credit “is now much wider, it’s really just lending,” said Stephanie Rader, global co-head of alternatives capital formation within Goldman Sachs Asset Management, and executive vice president of Goldman Sachs Private Credit Corp.
Despite higher interest rates, “the credit markets have been resilient. Companies have been refinancing, enacting extensions, doing creative solutions with lenders. Defaults have ticked up but that’s been benign. Peak rates are behind us, peak leverage is behind us," Rader said.
Some pension funds have embraced private credit, while others want to wait for a market dislocation or other event to lower prices.
“From my time being an allocator, it’s a very attractive return, coming in cash coupons, principal payments, with less volatility of returns and lower drawdowns," said Thomas. Asset allocators "are saying ‘this has a role in my portfolio.’”
Historically, private credit has returned about 300-to-500 basis points above public credit, Rader said. “That has tightened and narrowed in the higher quality senior part of the market. But for us, it’s still a very compelling risk reward.”
Thomas said returns on private credit can range from “high single digits up to 20%, depending on whether you’re using leverage, where you are in the capital structure and whom you’re lending to.”
Copia Group, for example, can charge higher rates simply because the firm lends in the lower-middle market, he said, to companies typically with $5 million to $100 million in revenue.
“Larger sponsors can’t roll out of bed to look at those deals. People talk about private credit as a monolith, and that’s not the case,” he said.
That's partly due to a lack of access to capital among women and under-represented communities, he said.
Preqin data show private credit firms at least 50% woman or minority owned hold a combined 2% of all private credit assets under management. At the same time, women own 40% of all businesses in the U.S. Minority entrepreneurs are also starting businesses at much faster rates than their white male counterparts in the U.S, said Thomas.
Copia Group “is committed to make the majority of our investments in gender-diverse or ethnically diverse firms," he said.
Goldman Sachs prefers to lend in recession-resilient sectors such as healthcare, software, business services, industrials and packaging. Copia Group mostly lends to business services, consumer and food sectors, healthcare, financial services and manufacturing.
