Opportunities in Private Credit: Stepping in as Banks Step Out

As banks pull back from many types of lending, demand for capital is outpacing supply, providing the best potential opportunities in private credit since the GFC.

Fallout from the most rapid rise in interest rates in four decades may be creating the best environment for private credit investors since the global financial crisis (GFC).

Banks are retreating in the face of liquidity constraints, regulatory scrutiny, and higher cost structures. Sharply higher interest rates have raised borrowing costs, removing excess liquidity across the economy and prompting more depositors to move savings into higher-interest accounts. Additionally, the first major reform in bank regulation in over a decade – if passed – would take effect next year and increase capital requirements at a time when bank capital is already at a premium.

As bank retrenchment creates a void in lending markets, private capital has been able to step in, providing a stable and longer-term source of funding to banks while also aiding banks in reducing the overall size of their balance sheet.

Amid these shifting dynamics, it is crucial to make two important distinctions when assessing the private market opportunity set.

First we must distinguish between the existing stock of credit and future credit origination. We expect the current interest rate environment to put pressure on much of the existing stock of credit – particularly corporate and commercial real estate-related credit that was originated in an environment of abundant supply and low interest rates. Yet bank retrenchment has reduced competition in many markets, creating new origination opportunities and a stronger position for the remaining lenders.