During 4Q22, clients took a new look at upper-middle-market direct lending as all-in spreads have widened by over 400 bps and lenders are able to get tighter terms. Strong deal volume was driven partially by a shift from public to private market debt financings in the recent market environment.
- As economic headwinds are expected to create stress on over-levered companies, there is a renewed interest in stressed and distressed investment opportunities.
- Demand continued to be strong for less-competitive areas of private credit with high barriers to entry and attractive risk/reward opportunities such as specialty finance, non-sponsor, lower-middle-market, and opportunistic lending.
- LPs are seeking alternative structures designed to streamline the investment process while improving underlying liquidity. A number of GPs are launching evergreen structures and private, non-tradeable business development companies as a response to LP interest.
- As interest rates declined after the GFC, private credit attracted increased interest from institutional investors.
Private Credit Fundraising
- Private credit fundraising was robust leading into the COVID dislocation, with a particular focus on direct lending, asset-based lending, and distressed strategies.
- In the current rising rate environment, a renewed focus has been placed on relative value, downside protection, and managers’ internal workout resources.
- There is also interest in strategies with strong collateral protection such as asset-based lending as well as capital solutions and distressed strategies.
- Larger sponsor-backed lending is seeing a new focus due to the disintermediation of high yield/broadly syndicated loans by private debt.
- Private credit performance varies across sub-asset class and underlying return drivers. On average, the asset class has generated net IRRs of 8% to 10% for trailing periods ended Sept. 30, 2022. Higher-risk strategies performed better than lower-risk strategies.
Disclosures
The Callan Institute (the “Institute”) is, and will be, the sole owner and copyright holder of all material prepared or developed by the Institute. No party has the right to reproduce, revise, resell, disseminate externally, disseminate to any affiliate firms, or post on internal websites any part of any material prepared or developed by the Institute, without the Institute’s permission. Institute clients only have the right to utilize such material internally in their business.
