Private Credit Boomed Amid Low Yields — And Now It’s Set to Flourish

Managers have pushed the benefits of floating rates for years. Only now are investors finally noticing.

Illustration by II

Illustration by II

With interest rates at record lows for a decade, investors have been piling into private debt to get a bump in yield over corporate bonds by taking on liquidity risk. But now with inflation spiking, a different feature is luring in investors: floating rates, which rise in line with interest rates.

With few investments that naturally benefit from rising rates, it’s not surprising that the category has grown. Assets in private credit funds reached a record $1.6 trillion in assets as of March 2022, according to a new report by Intertrust Group, a trust and corporate management company based in the Netherlands. That’s a 53 percent increase from five years ago, according to the report.

“There was a time when [private debt] sounded more exotic to institutional investors, but now, it’s a standard part of the conversation,” according to Randy Schwimmer, senior managing director at Churchill Asset Management. In fact, the private credit industry is growing so rapidly that the bigger players are already squeezing the smaller ones out of the market.

One reason behind the rise of private debt recently is that the instruments can protect investors against rising interest rates, which have been killing traditional bond portfolios since the central bank started signaling rate hikes in December.

“As we enter a new interest rate cycle characterized by higher inflation, fixed income investors may struggle to earn satisfactory yield on their long-duration investments,” according to a Blackstone post written by chief investment strategist Joe Zidle and global head of credit Dwight Scott. “In a rising rate environment, we believe floating rate loans are highly attractive, as income can rise alongside interest rate increases.”

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Schwimmer added that the floating rate hedge associated with private debt instruments is “very attractive.” According to a recent survey by The Lead Left, a weekly newsletter penned by Schwimmer, almost all, 95 percent to be exact, of institutional investors expect to maintain or increase their allocations to private debt in the next 12 months. The survey was conducted during the first week of April and received responses from 62 pension funds, insurance companies, family offices, asset managers, endowments, and foundations.

Besides being a floating rate hedge, private debt also emerged as a “safer third way” to bypass volatility in the public markets, according to Schwimmer. “The Ukraine war provided another example of how volatility from geopolitical risk can wreak havoc in the public equity markets,” he told Institutional Investor in an interview. “If you are an investor with a long-term outlook, that kind of volatility is not helpful.”

Blackstone’s Zidle and Scott agreed that less volatility is another reason why private debt appeals to investors. “Valuations [of private debt] are generally based on the fundamentals of the underlying companies,” they wrote. “Managers generally are not forced to mark private assets to market during periods of volatility. Private loans have offered relatively low historical volatility, while still maintaining attractive returns, when compared with the public market.”

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