A “Lifeline” from Private Lenders — Evening Brief – 05.10.24

For small and middle-market U.S. businesses, private credit is outpacing the broadly syndicated loan market in providing financing for M&A that don’t have a private equity sponsor, emerging as an important option for firms, according to industry group American Investment Council.

The report further noted that private credit remains a strong investment strategy, with returns outperforming other asset classes. Using Pitchbook data, the group highlighted that North American private credit vintages of 2017 and 2018 are already showing distributed/paid-in multiples above 0.5x, meaning more than half of their total value has already been given back to investors.

Of note, private credit funds have considerably outperformed the Morningstar high yield index, said AIC. In 2022, private credit funds had a 7.59% internal rate of return compared with a -3.24% return for the index.

In addition, loans from private lenders have served as a “lifeline” to small businesses, especially those that can’t qualify for loans from traditional banks or need capital beyond what banks can provide. According to the report, private credit has funded more non-leveraged buyouts each quarter since 2021 than syndicates.

The American Investment Council report also revealed that investors are increasingly recognizing the value of private credit and are continuing to commit capital to the asset class. Over the past 10 years, managers have raised nearly $1.3 trillion, and last year alone they raised nearly $136 billion, more than double the annual total raised a decade ago.

There is currently a “substantial amount of dry powder”, slightly more than $340 billion, available to lend but has yet to be deployed.

“Private credit is playing a crucial role in supporting businesses and delivering impressive returns for investors, especially in uncertain times, said Drew Maloney, president & CEO of the American Investment Council. “The industry’s resilience and flexibility are filling market gaps and providing customized financing solutions. Private credit has become indispensable for businesses seeking financing and is increasingly becoming their preferred option.”