Graphic: Weaker growth threatens private credit
Private credit is playing an increasingly prominent role in institutional investors' portfolios. Higher interest rates have helped boost private credit loan returns because they largely come with floating rates. Based on recent comments from Fed Chairman Jerome Powell, rates are expected to continue to increase. But should the U.S. economy significantly weaken, middle-market loans, which make up most private credit portfolios, could be hurt.
Strong fundraising: In the first half of the year private credit funds closed a total of $97.5 billion, compared with $213.8 billion for all of 2022. Notably, fundraising typically increases in the second half. Direct lending funds raised $29 billion vs. $64.5 billion in 2022.
Private credit fundraising by category (billions)
Loan returns: Middle-market direct loans' income component has grown as interest rates have increased, according to the Cliffwater Direct Lending index: Senior-Only, which focuses on loans held by business development companies. In Q2, income provided a 2.8% return vs. 1.7% a year ago.
Cliffwater Direct Lending index: Senior-Only
Trouble ahead? The Fed's campaign to combat inflation has resulted in the targeted midpoint of the federal funds rate rising to 5.375% from 0.125% in Q1 2021. Second-quarter GDP grew by 2.1% from 2% in the previous quarter, but private economists expect it to slow next year.
GDP and short-term interest rates
*Data for 2023 are as of June 30. Sources: PitchBook Data Inc., Cliffwater LLC, Federal Reserve, Bloomberg LP