3) Private credit opportunity expands as traditional lending tightens.
In the wake of the biggest interest rate hikes in decades, traditional lenders find themselves operating in an unfamiliar environment and private lenders are poised to seize the opportunity.
Facing higher liquidity constraints, higher capital costs, and increased regulatory scrutiny, banks are pulling the reins on commercial and industrial lending. As reported in the Fed’s January 2024 Senior Loan Officer Opinion Survey, banks are tightening premiums on riskier loans, spreads of loans over the cost of funds, costs of credit lines, and collateral requirements.3
Private lenders are stepping in to fill the void. Institutions are taking note and two-thirds (66%) anticipate more private debt will be issued in 2024 to meet growing borrower demand.1 This is likely to be a long-term trend as private debt AUM is projected to grow to $2.8 trillion by 2028, nearly double the total from 2022.4
“This sentiment mirrors our own experience as a direct lender. Private debt remains resilient and attractive for investors, who continue to see good returns on their investments,” says Nicole Downer, Managing Partner, MV Credit. “On the flip side, borrowers and Private Equity firms welcome the growth of the asset class which provides them with a reliable source of financing capital.”
Commercial real estate in particular, is creating opportunities. “Commercial property values generally speaking are anticipated to hit a bottom this year and, at the same time, $900 billion in loans will come due on commercial properties according to Mortgage Bankers Association figures,” says Sara Cassidy, Managing Director at AEW. “Owners need refinancing options – that will likely come with a greater amount of required equity – and with traditional lending sources on the sidelines or less active, this creates a significant opportunity for private lenders to fill the gap by entering the capital stack at a valuation that may be below replacement cost on high quality assets in good markets.”
Institutions are also anticipating that a boom in private lending will add up to investment opportunity in 2024 and 64% are bullish on the asset class. Competition for new deals may be fierce, as 45% say they will increase private debt allocations this year – more than any other alternative investment.1
When it comes down to how they will invest, it’s likely they will stick with the familiar. Right now, their investments focus on funds of funds (41%), direct lending (40%) and co-investment (39%).1
How institutions are invested in private debt1