Despite rising macroeconomic uncertainties, private credit managers remain confident about their business prospects.
More than 80 percent of global private credit managers are either bullish or cautiously optimistic about the market’s prospects over the next 12 months, according to the latest report from the Alternative Credit Council, the private credit affiliate of the Alternative Investment Management Association.
“When there’s recession and difficult economic times, that’s usually a good opportunity for this asset class,” Neale Broadhead, partner at CVC Credit Partners, commented on the report. “You tend to get the best vintages out of adversity, [as] long as you have a solid investment pipeline and discipline in your investment approach.”
The report was based on a survey of 54 private credit managers with $805 billion in combined assets. The respondents deployed a total of $127 billion in 2021, mostly to borrowers with average earnings between $25 million and $100 million.
The positive sentiment of private credit managers comes at a time when investors are increasingly eyeing opportunities in the asset class. According to the latest Global Alternative Fund Survey by Ernst & Young, 51 percent of investors aim to increase allocation to private credit in 2023, the highest percentage among all alternative asset classes.
“I’m bullish on the ongoing growth of direct lending,” said Andrew McCullagh, managing director and portfolio manager for private credit at the U.K.-based firm Hayfin, about the ACC report. “I’m bullish in terms of it being seen by investors as a good quality, defensive, low-volatility asset class [that] gives decent returns in difficult times.”
Private credit managers are taking advantage of the tailwind by expanding into new geographic locations, according to the ACC report. While the U.S. and the U.K. remain the two countries where managers see the most growth potential in the next one to three years, the rest of Europe and Asia have also emerged as attractive investment destinations.
“Much of this growth is being led by the private equity market, which continues to spearhead private credit’s expansion into new markets,” the report said. “This development is likely to prove valuable for the European and Asian economies as they seek to diversify the sources of financing available to borrowers.”
Despite their optimism, however, private credit managers are aware of the difficulties posed by the deteriorating economic backdrop. Fifty-five percent of managers identified inflation and other macroeconomic risks as the biggest challenges affecting borrowers in their portfolios, followed by labor market constraints and company-specific risks.
According to the ACC report, private credit fund managers will respond to the challenge “by being more selective when deploying capital [and] focusing on businesses in non-cyclical sectors, [as well as] those with strong cash flows and the ability to retain pricing power.”