As private credit cements its role in today’s market, we believe long-term success will belong to those who prioritize thoughtful manager selection and disciplined fundamentals. Nik Singhal, Group Head of Direct Lending, shared his outlook on the asset class with Mergers & Acquisitions, including why private credit has continued to flourish.
Highlights from Nik:
What is your long-term outlook on private credit?
We believe private credit will continue to play an important role in investors’ portfolios, generating consistent income while providing downside protection. Of course, there will be times when market conditions will deviate from long-term trends. In our view, instead of trying to time the market, those investors who focus on selecting managers with a healthy track record through market cycles, deep industry relationships, emphasis on strong documentation, and in-house workout capabilities, will come out winners in the long term.
Do you expect traditional banks to become more active in the private credit space? Why or why not?
We expect banks to remain constrained in their ability to devote more balance sheet to making private credit loans. Even if the regulatory capital regime was to become “less unfavorable”, we believe the investments required by banks to rebuild the infrastructure, as well as the continued uncertainty with the capital treatment, would prevent a reversal of the trend that has shifted the landscape from banks to non-banks. Banks will, however, continue to remain an important stakeholder as (i) providers of leverage private credit vehicles and (ii) a sourcing channel especially in the core and upper middle market (via partnerships with non-bank lenders).
Do you think we’ve hit our peak of private credit funds, or do you expect more players to jump in?
We expect newer players to emerge and existing players to expand in some of the upcoming asset classes such as asset-based lending, consumer finance and specialty finance. In the more mature asset classes such as cash-flow based middle market lending, we expect the number of participants to rationalize as weaker/sub-scale players will either consolidate or close shop.
Could you envision a pull-back from private credit at some point? If so, what might trigger this?
In our view, private credit has continued to flourish for a reason, with the reason being that it has provided better returns with lower risk than broadly syndicated loans and high yield for over 20 years now. As long as that continues to be the case, it is hard to see a systemic pullback other than a temporary pullback driven by investor psyche during weak market conditions. So what could cause private credit to systematically underperform BSL and HY? We believe it would have to be an overabundance of capital (more than the structural demand for private credit) paired with strategies that do not provide downside risk mitigation.