Private credit returns are being driven down by the COVID-19 crisis, which could lead to secondary market sales of investments, industry insiders say.
The expected returns of private credit as of Dec. 31 were 6.95% unlevered and 9% levered, according Cliffwater LLC, an alternative investment consultant based in Marina del Rey, Calif. Preliminary first quarter returns are about -5% unlevered and -9% levered. However, Cliffwater executives expect significant variability by manager because of the range of strategies, Cliffwater CEO Stephen Nesbitt said in an email.
Credit had traditionally offered between mid-single digits to more than 20% returns, depending on the strategy, according to a 2017 Cambridge Investment Research Inc. report on the asset class.
A drop in returns could lead to investors resorting to selling limited partnership interests on the secondary markets, said Gerald Cooper, New York-based partner at investment bank Campbell Lutyens.
Investors had piled into private credit over the past 10 years with more than $870 billion flowing into the asset class, he said.
"There is about $90 billion of outstanding net asset value in funds that are 5 to 10 years old," he said.
"We were beginning to see LPs rationalize their credit portfolios prior to the downturn," he said. "Post-crisis there may be a heightened desire to reduce allocation or sell non-core relationships."
The pain suffered by private credit managers could also provide investment opportunities for secondary market managers and for investors on the lookout for well-priced secondary market deals, he said.
"These loans may be priced at a level that could now be interesting for secondary buyers. If they have exposure to the sponsors they will also be familiar with the underlying credits," he said.