Private credit set to explode in the coming years
Blackstone and other leading players in the private credit market believe the asset class is set for enormous growth in the coming years. That reflects structural factors such as stricter banking regulation, as well as huge demand for financing to fund secular trends such as the energy transition and the growth of data centers.
Key takeaways
Private credit markets have grown rapidly over the past decade, fueled by structural factors such as stricter banking regulation.
Blackstone believes the market could grow to $25 trillion, up from $1.6 trillion currently, driven by secular trends such as the energy transition.
That should create huge opportunities for investors, given that private credit has historically offered compelling performance in relation to other segments of the fixed-income market.
Private credit set for takeoff
Private credit markets have grown rapidly over the past decade, with PitchBook estimating they currently stand at around $1.6 trillion (including around $500 billion of dry powder), up almost fourfold since 2013. The US accounts for the largest share of the market, with around $1.1 trillion, while Europe accounts for most of the remainder.
Yet according to the likes of Blackstone, the world’s largest alternatives manager, the asset class is still in its infancy, with explosive growth set to take place in the coming years. In June, Blackstone Credit and Insurance’s global chief investment officer, Michael Zawadzki, told Bloomberg Television the market could hit the $25 trillion mark. According to Zawadzki, that reflects the need to finance data centers and the energy transition.
Figure 1: Private-debt institutional fund AUM and dry powder ($bn)
Higher base rates, the shift from banks to private lenders, and the proliferation of strategies to access private credit will also fuel the market’s growth. Zawadzki added that private investment-grade strategies, including asset-backed finance and infrastructure credit, are “really compelling” in the current market. The size of the asset-based finance market is about $5 trillion to $10 trillion, he said.[i]
Private credit in asset-based finance in its infancy
Last year, Rob Camacho, Blackstone’s co-head of asset-based finance within the firm’s Structured Finance Group, said that private credit lenders are just getting started in the world of consumer and asset-based finance. Camacho told Bloomberg:
“Large-scale players who need asset-based debt will prefer to work with a single manager able to commit to those transactions. It will become more appealing over time to borrowers and investors, especially if the current yield environment persists. Today, we are a very small portion of the whole asset-based finance market. There’s a lot of room to run.” [ii]
Bigger players to tap the market
Most of the companies that currently borrow this type of debt are small- or mid-sized firms with barely any corporate debt. Camacho said that Blackstone is financing consumer loans, aircraft loans, fund finance, renewables like commercial and industrial solar, and critical infrastructure such as cell towers, as well as intellectual property.
Yet Camacho believes Blackstone is just scratching the surface and that “as interest rates continue to remain where they are, more and more companies are going to be more efficient with their balance sheet, so many more assets are going to become financeable.”
Camacho believes that big investment-grade companies will soon be tapping the asset-based debt market, explaining that “there are companies that obviously have very specific assets on their balance sheet or a specific need where a financing solution can be customized.”
Other key players are also positive about the outlook for private credit. Morgan Stanley, for example, said in its 2024 market outlook that the sector could become a $2.8 trillion market by 2028. This reflects inherent advantages such as the ability to tailor private credit solutions to an individual borrower’s needs in terms of size, type or timing of transactions.
Moreover, the majority of private credit lending is in the form of floating-rate investments that change as rates change, providing real-time interest-rate mitigation, as distinct from investments like fixed-rate bonds.
Investor appeal
The appeal to investors is clear. Private credit has historically offered compelling performance in relation to other segments of the fixed-income market, says Ashwin Krishnan, Co-Head of North America Private Credit at Morgan Stanley Investment Management. Krishnan cites figures from Morgan Stanley showing that since the global financial crisis, when private credit’s growth began, direct lending (the most common type of private credit) has provided higher returns and lower volatility than either leveraged loans or high-yield bonds.
Figure 2: High returns relative to volatility
Source: https://www.morganstanley.com/ideas/private-credit-outlook-considerations
* - see footnote
Alliance Bernstein, meanwhile, says that while private-market growth in recent years has been “remarkable”, it thinks there is more to come. That, according to the asset management firm, reflects structural factors such as stricter banking regulations, which remain in place. It adds that borrowers have also grown accustomed to the speed and greater certainty of execution when dealing with private lenders.
Conclusion – rapid growth creates fresh opportunities for investors
At Petiole, we are confident that private credit’s role in supporting key sectors of the economy will continue to expand, offering increasing opportunities for investors to diversify their asset allocations and enhance portfolio performance.
To find out more about how we can help you access the growing opportunities in private credit, click on this link:
https://www.petiole.com/en/who-we-are
*Data represents the period from Q1’08 to Q3’23. Calculated as annualized average returns divided by volatility. Volatility is measured using standard deviation.
“Direct Lending” is represented by the Cliffwater Direct Lending Index (CDLI) and is calculated from quarterly data, which has been annualized. “High Yield Bonds” is represented by the ICE BofA High Yield Index calculated from annualized monthly data, except for the loss experience chart, where this is sourced from Moody’s. “Leveraged Loans” is represented by the Morningstar LSTA US Leveraged Loan Index calculated from annualized monthly data, except for the loss experience chart, where this is sourced from Moody’s. The index performance is provided for illustrative purposes only and is not meant to depict the performance of a specific investment.
