What are you seeing in Private Credit and what are read throughs to broader credit?

What are you seeing in Private Credit and what are read throughs to broader credit?

Sam Acton, CFA, Portfolio Manager, Co-Head Fixed Income

Private Credit: The 3 Concerns.

After several years of rapid growth and steady performance, private credit has come into the market's focus recently for three key reasons. The sector carries high exposure to software companies that could face potential disruption from AI. Several rapid collapses in certain loans have brought into question the reliability of NAV marks. And increased redemption pressures have led several fund managers to gate their funds.

Contagion Risk. Is it Spreading?

A key question from advisors has been whether these developments could spill over into broader credit markets. We have observed some selling pressure in loans, where exposure to software issuers is also relatively concentrated, as reflected in the Invesco Senior Loan ETF (BKLN). We have also seen moderate spread widening in both high-yield and investment-grade credit, although flows into public credit markets have remained largely supportive and overall fundamentals remain solid outside of a few problem sectors.

Key Things to Remember About Private Credit.

It is important to remember a few of the attractive features that helped private credit grow significantly over the last decade. These are primarily secured loans, ahead of shareholders in the capital structure, meaning, if private credit was truly in trouble, Venture Capital and Private Equity would likely have a much more severe impact. Most vehicles were set up with intentional limits on liquidity, as fund managers recognized the illiquid nature of the assets and didn’t want to be exposed to investor sentiment. Finally, credit losses and defaults are simply a part of the lending business. That is what the credit spread is there to compensate lenders for.

Key Indicators we are Watching

We continue to monitor three indicators to gauge investor sentiment:

Publicly traded Business Development Companies’ (BDCs) stocks and bonds, as well as redemption and flow trends
Software sector equities
Loan market spreads and flows

Based on what we’re seeing today, we do not anticipate contagion risk spreading into broader public credit markets. Over time, we would expect to see greater dispersion in credit performance across private credit managers, as some may have made better loans and would likely avoid potential credit losses.

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