Private credit has grown over the past two decades, evolving from a modest financing appendage to a significant market force. The decline in bank lending over the past 50 years, juxtaposed with rising bank deposits, set the stage for nontraditional lenders to address the funding gap.

Structural changes following the global financial crisis of 2007-2008, including regulations like Dodd-Frank and Basel III, further led banks to scale back traditional lending. This trend was accentuated by bank consolidations and regional bank failures in the United States in 2023.

In response, private credit has expanded its reach, offering businesses an alternative path to capital. The absence of extensive syndication processes, credit rating requirements, and large-scale capital constraints have made private credit attractive to companies. Additionally, the certainty and speed of deal execution appeals to corporate borrowers.

Private credit's growth has also been driven by its potential for diversification and attractive yields, with strategies that exhibit lower correlation to public market instruments like equities and fixed-income securities.

As financial markets continue to evolve, private credit is set to remain a crucial component, addressing lending mismatches and supporting long-term growth prospects despite short-term fluctuations in capital flows and deal opportunities.

However, with opportunity comes risk. Private credit investments require careful navigation of credit, liquidity, and leverage risks. Like public debt, the asset class faces potential risks stemming from financial distress, but careful issuer selection and proactive monitoring can mitigate these risks.

Fixed-income investments are subject to interest rate and credit risk; their value will normally decline as interest rates rise or an issuer in unable or unwilling to make principal or interest payments.

Source: John Hancock Investment Management, Prequin, Federal Reserve Board. Data as of June 2023. Covers period between December 2008 and June 2023.

Diversification does not guarantee a profit or eliminate the risk of a loss.

Commentary

Where Were The Feds' Pointy Heads?

Post-Switcheroo

Bravo, Mr. Buffett!