Research Reports

Private Credit - What Is It Really?

February 01 , 2024

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Executive Summary

Private credit has been a fast-growing investment segment and is being seen as an asset class with immense growth prospects and attractive estimated returns. While private credit gained traction with the pull back in bank lending post global financial crisis, in recent months, tightening of lending standards by the banks amid interest rate hikes and uncertain economic outlook is further spurring growth in private credit’s market size. Private credit market outlook is also expected to be positive supported by factors such as tightening lending standards by the banks, borrowers’ preference for customized funding solutions and speed of execution, investors’ desire for diversification etc. Benefits of private credit market investing include income generation, resilience and diversification. A comparison of risk-return profiles of asset classes shows direct lending, a segment of private credit, has lower risk and higher return than its more liquid public market peers.

Globally, many major fund managers have exposure to private credit. The asset class is also seeing interest from sovereign investors. According to Global SWF, among top 10 global state-owned investors (SOIs) by AuM, average allocation to private credit has grown from 2% in 2015 to 3.2% in 2020.

As with any other asset class, private credit poses certain risks such as heightened credit risk, illiquidity, opacity of private credit market data etc. Regulatory landscape pertaining to the asset class is evolving with some key developments taking place in private credit market in 2023. Private credit funds charge a management fee and an incentive fee. Management fee had ranged between 0.4% to 1.75% as of Q3 2022. Additionally, an upfront placement fee and distribution fee are charged for Class D and Class S shares. Given the emerging nature of asset class and associated regulatory landscape, it is more suitable for institutional investors and high net worth individuals.

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