The rapid rise of funds that make loans directly to buyout deals and other highly indebted companies — known as private credit — is among the hottest topics in finance. The sector has minted fresh billionaires, while being called a bubble by traditional financiers like UBS Group AG Chairman Colm Kelleher and attracting warnings about the dangers it could pose. Investors need to be sharp-eyed about what private credit managers are doing with their money. This is, after all, high-yield, high-risk debt. The mad scramble for new business could easily lead to many bad lending decisions, as it always has in the history of banking. But fears that private credit could threaten the financial system should be more soberly assessed, according to the commentary. The structure of most private credit funds answers many of the questions about panics and runs posed by the 2008 meltdown because they typically fund their lending with long-term liabilities that can’t easily take flight. Interest in private credit managers has ballooned as the money has flooded in, while their lending approach brought advantages over traditional buyout funding, particularly this year. Total assets under management in the sector have nearly doubled since 2019 to more than $1.6 trillion, according to Preqin Pro, a data provider. Scale has led to ever-larger individual loans, like this month’s record $4.9 billion for online classifieds company Adevinta ASA. This year, private equity dealmakers have struggled to raise debt through leveraged loans arranged by banks or junkbonds, opening more doors for private credit fund managers. Bond investors lost appetite for high-yield debt, while big banks have demanded extra pricing flexibility when underwriting buyout loans to protect against getting stuck with unsellable debt, like the $13 billion that helped fund Elon Musk’s purchase of Twitter, now named X, last year.
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*The views expressed in this commentary are from the author/publication cited, are meant for informative purposes only, and are not an official position of ABI.