Defined Benefit
Insurance Assets
Nonprofit

Private Credit Interest Still High Despite Illiquidity Premium Close to Zero

Private Credit Interest Still High Despite Illiquidity Premium Close to Zero
clock
1 min 21 sec

U.S. corporate yields rose dramatically at the end of 2021 and the first six months of 2022, due to higher interest rates from tighter Fed policy and a widening of high yield spreads. Spreads widened because of weaker credit conditions as the U.S. economic outlook worsened. The illiquidity premium between public and private credit had been whittled down close to zero, but we are seeing a slow adjustment with SOFR widening out 200 bps and new private loan pricing at a 75-100 bps wider spread. A full adjustment between the public and private markets may take several quarters.

2Q22 private credit trends
  • Private credit fundraising was robust leading into the COVID dislocation, with a particular focus on direct lending and distressed strategies.
  • Fundraising slowed in the first half of 2022 as rate hikes and market volatility led to investor uncertainty.
  • For mature private credit programs, demand for diversifying strategies is increasing to capture opportunities outside of traditional sponsor-backed direct lending.
private credit

A permanent part of portfolios

  • Core yield and income-generating characteristics remain attractive in private credit portfolios, in spite of the shrinking illiquidity premium.
  • Despite the shift from a low-yield environment, private credit has become a permanent asset class in many portfolios.
  • Many direct lending assets are floating rate, which can add protection against rising rates.

New opportunities on the horizon

  • Distressed opportunities in U.S. and Europe are expected to increase across both corporate and non-corporate assets.
    • Enhances importance of seasoned workout talent across sub-strategy types
    • Brings the need for increased underwriting discipline
  • Other opportunities include those that offer diversification through differentiated collateral and/or low correlation to public markets, including specialty finance, asset-backed lending, and niche areas.

Posted by

Share
Share on facebook
Share on twitter
Share on linkedin
Related Posts
Private Markets

Private Credit Gained in 4Q23 but Lagged High Yield Benchmark

Constantine Braswell
Callan expert analyzes private credit activity in 1Q24.
Public Markets

Stocks Continue Rally; Bond Returns Fall Amid Rate Cut Uncertainty

Kristin Bradbury
Callan expert analyzes the performance of global markets in 1Q24 and the outlook for the year.
Private Markets

Private Credit Performance Tops Leveraged Loan Index Over Long Time Periods

Catherine Beard
An update on private credit performance in 4Q23
Public Markets

Stocks Near a Record High, and Bonds Reverse Course

Kristin Bradbury
Kristin Bradbury analyzes global stock and bond markets in 4Q23.
Private Markets

Private Credit Returns Exceed Those of Leveraged Loans

Catherine Beard
Catherine Beard and Roxanne Quinn analyze 3Q23 private credit activity.
Public Markets

Tough Quarter for Stocks, with Bonds Facing Third Straight Annual Fall

Kristin Bradbury
Kristin Bradbury assesses the global markets in 3Q23.
ESG

S&P Global Moves Away from Numeric ESG Credit Indicators

Kristin Bradbury
Kristin Bradbury explains why S&P Global dropped its numeric credit indicators and what it means.
Private Markets

Private Credit IRRs Stay Steady and Range from 8%-10%

Catherine Beard
Catherine Beard analyzes private credit activity in 2Q23.
Public Markets

Tech Stocks Lead U.S. Indices Higher; Rate Increases Send Bonds Lower

Kristin Bradbury
Kristin Bradbury assesses the global stock and bond markets in 2Q23.
Private Markets

Our First Private Credit Fees and Terms Study: What We Found in 2023

Catherine Beard
Catherine Beard provides a summary of our Callan 2023 Private Credit Fees and Terms Study

Callan Family Office

You are now leaving Callan LLC’s website and going to Callan Family Office’s website. Callan Family Office is not affiliated with Callan LLC.  Callan LLC has licensed the Callan® trademark to Callan Family Office for use in providing investment advisory services to ultra-high net worth clients, family foundations, and endowments. Callan Family Office and Callan LLC are independent, unaffiliated investment advisory firms separately registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940.

Callan LLC is not responsible for the services and content on Callan Family Office’s website. Inclusion of this link does not constitute or imply an endorsement, sponsorship, or recommendation by Callan LLC of their website, or its contents, and Callan LLC is not responsible or liable for your use of it. When visiting their website, you are subject to Callan Family Office’s terms of use and privacy policies.