Private Credit Outlook: Evolution and Opportunity

Private credit has in a little more than a decade evolved from a niche asset class to a key component of a diversified investment portfolio. We think it will be even more important in 2024 as banks’ reluctance to lend widens the opportunity set for investors.

A potential slowdown in economic growth may put pressure on some borrowers this year, making manager skill in proactively managing and navigating credit risk across a portfolio a key focus. At the same time, with US inflation likely at or near the peak and prices in the eurozone heading back toward target, we expect to see increases in capital-market activity and private transaction volume.

In short, the year ahead has the potential to be a rewarding one for those invested in private credit. Opportunities span the risk-return spectrum across private credit asset classes, including corporate lending, commercial real estate, energy transition and consumer finance. And investor allocations are increasing. According to Preqin, a data provider, total assets have nearly doubled since 2020 to $1.6 trillion and are expected to swell to $2.3 trillion by 2027.

The question investors are likely to be asking in 2024 isn’t whether to increase exposure to private credit. It’s how.

Banks on the Backfoot

The way we see it, investors will have multiple trails to tread. Banks sharply reduced lending last year as they shed deposits and took mark-to-market losses on assets as interest rates soared (Display). More than $1 trillion of household deposits have left the US banking system since interest rates started their rapid rise in 2022, adding momentum to the trend of bank retrenchment that began after the global financial crisis.

Banks in Defensive Mode After the Deposit Outflows