We’ll be curating stories from management guru John Bittleston and making them free to read.Private credit has boomed globally as banks, under pressure from regulators since the global financial crisis to reduce risk, have pulled back from lending to smaller, potentially more vulnerable companies. The private credit market has expanded to US$787.4 billion, from just US$42.4 billion in 2000, according to London-based research firm Preqin.
The trend is likely to continue, according to findings from the Alternative Credit Council, which represents private credit asset managers globally. Its survey of firms managing US$400 billion in private credit assets reported that half expect family offices to keep adding more money to private debt strategies over the next three years.There isn't one playbook for investing in this market.
But as the strategy's popularity with billionaires has grown, competition for private loan deals has ignited. Family offices can move more quickly to sign new business than can bigger institutional peers such as pension funds, says Mark Sotir, president of Equity Group Investments , which manages Chicago billionaire Sam Zell's money.
So-called middle-market lending, which involves loans of US$50 million or larger, is overcrowded. More competition has also started eroding the yields that made direct lending appealing in the first place. There are also liquidity risks. The underlying loans in private debt aren't widely traded, which means they're likely to be hard to sell in a crisis when markets turn volatile. In short, investors could find themselves looking on helplessly as their assets become worthless during a crash. Moreover, when investing in a closed-end fund with an asset manager, the capital is locked in with virtually no opportunity to withdraw until the asset matures.