Gregg Disdale, London-based head of alternative credit at Willis Towers Watson PLC, said private credit continues to be popular among asset owners in the United States and elsewhere. In many parts of the private credit market, there is still an illiquidity premium, he said. What also makes the asset class attractive to some investors is that private credit often pays steady income and is less volatile than fixed income, he said.
The possibility of interest rate increases makes investors more interested in private credit, which tends to have a floating rate, Mr. Disdale said.
That’s not to say there aren’t risks, Mr. Disdale said. Although delinquencies have been “unusually low”, if interest rates rise it could put pressure on borrowers, potentially leading to an increase in delinquencies, he said.
“But unless there is a meaningful recovery in defaults,” it should be a good environment for private debt, Mr. Disdale said.
Law firm Proskauer Rose LLP, New York, released findings from its latest Private Credit Default Index on Jan. 27, showing an overall default rate of 1.04% for the fourth quarter, representing a decline defaults of 1.5% in the third quarter and 2.4% in the first quarter of 2021. Defaults have generally declined since a peak of 8.1% in the second quarter of 2020, according to data from Proskauer.
Private credit strategies such as direct lending have been “exceptionally popular” with spreads between private and US Treasuries narrower now than in 2010, Mr Disdale said. In addition, the set of opportunities expands. Borrowers are looking to use private credit rather than more traditional loans because of the flexibility of private lending and because private lenders are willing to lend a larger amount, he said.
At the same time, the pace of private credit investment rebounded “very strongly” from the fourth quarter of 2020 to 2021, Mr Disdale said. Investment activity is expected to continue in 2022, he said.