Gregg Disdale, London-based head of alternative credit at Willis Towers Watson PLC, said that private credit continues to be popular among asset owners in the U.S. and elsewhere. In many parts of the private credit market, there is still an illiquidity premium, he said. Also making the asset class attractive to some investors is that private credit often pays regular income and is less volatile than fixed income, he said.
The possibility of interest rate increases is making investors more interested in private credit, which tends to have a floating rate, Mr. Disdale said.
That is not to say there are no risks, Mr. Disdale said. While defaults have been “exceptionally low,” should interest rise it may put pressure on borrowers, potentially resulting in an increase in loan defaults, he said.
“But unless there is a meaningful pickup in defaults” it should be a good environment for private debt, Mr. Disdale said.
Law firm Proskauer Rose LLP, New York, on Jan. 27 released the findings of its most recent Private Credit Default index, showing a 1.04% overall default rate for the fourth quarter, representing a drop in defaults from 1.5% in the third quarter and 2.4% in the first quarter of 2021. Defaults have generally been going down since a peak of 8.1% in the second quarter of 2020, Proskauer data shows.
Private credit strategies such as direct lending have been “exceptionally popular” with spreads between private and U.S. Treasury bonds narrower now than in 2010, Mr. Disdale said. What’s more, the opportunity set is growing. Borrowers are looking to use private credit over more traditional loans due to the flexibility of private loans and because private lenders are willing to lend a higher amount, he said.
At the same time, private credit investment pace has rebounded “very strongly” from the fourth quarter 2020 through 2021, Mr. Disdale said. Investment activity is expected to continue in 2022, he said.