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Trends to Watch in the Private Credit Space as Markets Evolve

SS&C has remained closely engaged with the growing private credit sector and how the alternative asset class continues to evolve given current market conditions. The 3rd Annual LPGP Connect CFO/COO Private Debt forum will be held in New York City on Thursday, September 29, 2022, and will highlight practitioners providing valuable insights into future challenges and opportunities for firms.

Following the 2008 financial crisis, private credit investing steadily increased as an attractive alternative, especially for lower and middle-market firms seeking to fund growth activities. Now, on the tail end of a global pandemic and amid rising interest rates and inflation, the following themes will likely prove to be good indicators of how the alternative asset class is able to be responsive.

Maintaining the strength of private credit

Due to the advantageous nature of private credit inherently being low-risk and less reliant on the performance of the stock market, the market volatility of the past couple of years has been less significant. Contrastingly, with private credit being higher in the capital stack, valuation compressions have been an obstacle but haven’t proven to substantially hinder the asset class. Looking ahead, default rates for the remainder of the year are expected to be relatively muted but should be closely watched as they have the possibility of increasing into 2023 and beyond.

Additionally, the structure of the sponsor-borrower relationship of private debt is a real benefit, allowing for greater certainty and timeliness for financing. When the market is constrained and can’t provide borrowers with the necessary capital, private credit offers an attractive opportunity. This has led to increased activity in trade finance to address supply chain issues.

Providing additional opportunities

Private credit offers interesting opportunities for investors. Without having to rely on the traditional strategies of a bank, nonbank lenders can be more creative with their strategies, including asset-based lending, aviation, corporate real estate and more. This allows investors to explore areas without as much competition from banks.

Particularly for limited partners (LPs), private debt has opened up new opportunities for deals as more evergreen restructures have formed with less cost and resource friction going in and out of an evergreen fund. Specialty finance assets not dependent on corporate cash flow or the market are especially attractive to LPs, offering more flexibility than traditional credit.

Private credit is a great way to provide balance to a portfolio. Software, healthcare and business services are a strong pipeline with revenue visibility in this space, and their transfer to a digital footprint has been accelerated over the past few years.

Responding to the “new normal”

The characteristic strengths of private credit have positioned the asset class to shine as the economy finds its footing in the wake of the volatility of the past few years. This is largely a result of highly selective sponsor-borrower relationships and the flexibility that private credit funds offer.

In an uncertain environment, investors like the protection of good risk-adjusted return (RAR) opportunities in lower and middle market investments, as well as the ability to be selective and make the best credits. As it stands, this has resulted in an accelerated market for private credit; however, fund managers must recognize that scalability can introduce increased risk and should be careful not to overextend.

Learn more about how SS&C’s solutions can enable your business to thrive in the private debt space while remaining agile and responsive to market factors.  Schedule a brief introductory call with our team today.

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