Private credit performance varies across sub-asset class and underlying return drivers but has generally delivered IRRs in the 8%-10% range.
Key trends in private credit
- Over the past five years the asset class has generated a net IRR of nearly 8%.
- Higher-risk strategies such as mezzanine and credit opportunities have had higher returns than lower-risk strategies such as senior debt over long time periods.
- Senior debt strategy returns are driven primarily by coupon income with less equity upside than higher-risk strategies.
- Recent private credit performance has been boosted by floating rate structures but hindered by smoothed valuations.
- Private credit remained in high demand across Callan’s investor base, and a number of large defined benefit plans are looking to increase their existing private credit allocations from 2%–3% to 5%–10%.
- While we always work to build out diversified client portfolios, we think there is particularly interesting relative value in upper middle market sponsor-backed lending and asset-based lending.
- We are seeing an uptick in stress for some individual names in direct lending portfolios due to a combination of input cost inflation and increased interest expense.
- Private credit AUM stood at over $1.5 trillion at the end of 2023, with Preqin forecasting the asset class will grow to over $2.5 trillion by 2028 at a 11% CAGR from 2023 to 2028.
- Direct lending is expected to grow steadily through 2028 as investors increase their private credit allocations. Distressed exposure will grow a bit more slowly with other strategies such as opportunistic, special situations, and other niche diversifiers growing more quickly.
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