The Opportunity in Private Corporate Credit Investing

For traditional fixed-income investors seeking higher yield and/or inflation protection, private, senior secured, sponsored debt provides an attractive alternative.

Private, floating-rate corporate debt – debt that is originated without the use of a bank or other financial intermediary – is one of the fastest growing alternative asset classes, right behind private equity, as it provides both higher yields and an inflation hedge. The growth of the private credit market exploded after the global financial crisis of 2008-2009 as private credit rushed to fill the gap that the banking industry was no longer able to fill because of the distress of its balance sheets. Tightened capital standards made loans to middle-market companies unattractive for banks, shutting out most small- and middle-size companies from the bank market. In addition, the 2010 enactment of the Dodd-Frank Act made it increasingly expensive for small banks to operate, cutting off their supply of loans to small and mid-size companies.

Preqin, the foremost provider of data for the alternative asset community, estimated that at the end of 2021 private credit had about $850 billion in assets, behind the only $4.4 trillion invested in private equity. Further fueling the growth of the market was the historically low level of interest rates – private credit offered the potential for higher returns in exchange for giving up liquidity. Further impetus was provided by concerns about the risks of rising inflation – private credits are floating rate (with reset dates typically of either one or three months), thus offering a lower level of volatility than traditional fixed-rate debt, and the shorter duration offers inflation protection. And finally, in recent years there has been a trend in the publicly traded institutional loan market toward less creditor downside protection as more covenant-lite loans were originated. By October 2021, covenant-lite loans represented about 91% of the institutional loan market and 86% of outstanding leveraged loans in the S&P/LSTA Leverage Loan Index, according to S&P Global. Thus, private credit not only offered higher yields but superior credit protection in many cases.