Private credit performance varied across sub-asset class and underlying return drivers. On average, the asset class has generated net IRRs of 8% to 10% for trailing periods ended March 31, 2023.
Key trends for private credit
- As interest rates declined after the GFC, private credit attracted increased interest from institutional investors.
- Private credit fundraising was robust leading into the COVID dislocation with a particular focus on direct lending, asset-based lending, and distressed strategies.
- There is a renewed focus on relative value, downside protection, and managers’ internal workout resources.
- There is also interest in strategies with strong collateral protection such as asset-based lending as well as capital solutions and distressed/special situations strategies.
- Larger sponsor-backed lending is seeing a new focus due to the high yield/broadly syndicated loans disintermediation by private credit.
- U.S. sub-investment grade corporate yields rose dramatically at the beginning of 2022 with yields peaking in September. This was a combination of higher interest rates due to tighter Fed policy and a widening of high yield spreads.
- Spreads widened during the first half of 2022 due to weaker credit conditions as the U.S. economic outlook worsened. This has since moderated.
- Default rates for U.S. corporate bonds ticked up in 2Q but remained well below the historical average of 3%-4%. Callan expects defaults to increase somewhat in coming months as economic growth slows and potentially turns negative.
- The Corporate Bond Market Distress Index (CMDI) rose rapidly during the first nine months of 2022, especially for investment grade (IG) bonds, highlighting market volatility and a drying up of liquidity, but it has fallen since then.
- In 2023, as the IG component of the distress index continued to fall, the high yield bond indicator was roughly flat with the end of 2022. The CMDI incorporates a range of indicators, including new issuance and pricing for primary and secondary market bonds.
- During 2Q23, clients took a new look at upper-middle-market direct lending as all-in spreads have widened by over 500 bps and lenders are able to get tighter terms. Strong deal volume was driven partially by a shift from public to private market debt financings in the recent market environment.
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