Private Credit Outlook: The Bright Side of Higher Rates

More clarity on interest rates means more clarity on the investment outlook and the opportunities across private markets.

When it comes to the cost of capital, “higher-for-longer” has been the dominant theme in markets for at least a year now. And it’s likely to remain so—even if central banks deliver a handful of expected interest-rate cuts in the months ahead.

Stubbornly high borrowing costs and sticky inflation will put pressure on cash-flow stability and on some asset valuations. They are also starting to bring the medium-term rate and return outlook into sharper focus. That should increase transaction volume across private markets. Meanwhile, the global economy, driven in part by solid US growth, has held up extremely well.

What’s more, persistent stress among small and mid-sized banks who must comply with changing regulations and funding needs should broaden the investment opportunity set for private lenders and enhance return potential. We consider this good news for experienced lenders with the ability to source, underwrite and manage credit risk throughout the economic cycle.

In other words, there’s a bright side to a higher-for-longer rate environment. And as bank lending declines and public markets shrink, the private market universe continues to expand. We expect to see attractive opportunities across the risk-return spectrum.