Graphic: Private credit's tough outlook
As investors' risk expectations have shifted this year, private credit fund returns have suffered. The Cliffwater Direct Lending index, consisting of directly originated middle-market loans, returned 0.5% in the second quarter, weighed down by unrealized losses of 1.5%. While many private credit loans have floating-rate structures that could benefit from higher short-term interest rates, investments could lose value as companies run into greater financial difficulty.
Closings slow: Through Nov. 4, 116 private credit funds closed, totaling $140.1 billion. For all of last year, 306 funds raised $228.8 billion, well above prior years. Direct lending remains the most popular option, accounting for 46.5% last year, compared with 1% in 2006.
Private credit fund closings
Assets drop: Through the first half of the year, assets under management fell 3.1% to $1.2 trillion. Private credit funds held about $425 billion in dry powder, down from $451 billion at the end of 2021.
Private debt AUM (billions)
Lower returns: Private credit funds' internal rate of return dropped to 0.6% in Q1, based on preliminary data collected by PitchBook Data, down from 3.2% in Q4. The Morningstar LSTA US Leveraged Loan index lost 0.1% in the first quarter — the first negative quarterly return since Q1 2020 — and 2.3% for the first 10 months of 2022.
Private credit fund returns
Endowments' exposure: As of June 30, 2021, higher education endowments with more than $1 billion in assets averaged 1% in private credit, and those with $500 million to $1 billion averaged 1.65%, according to NACUBO. Many public pension funds have also been investing in the asset class as well.
Average endowment allocation
| Asset class | Allocation |
|---|---|
| Public U.S. equity | 12.8% |
| Public non-U.S. equity | 12.2% |
| Global equity | 7.5% |
| Investment-grade debt | 6.1% |
| Non-investment-grade debt | 0.5% |
| Hedge funds | 17.0% |
| Private equity and venture capital | 27.2% |
| Real assets | 9.9% |
| Private debt | 1.0% |
| Cash | 3.3% |
| Other | 2.5% |
Sources: PitchBook Data Inc., National Association of College and University Business Officers, Bloomberg LP
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