Private credit has emerged as the third largest asset class in private capital markets. It provides financing to private companies who have limited access to traditional bank lending. While COVID-19 initially impacted some areas like high yield bonds, private debt funds have shown steady growth over the past decade. Investors see private credit as an effective way to diversify and reduce volatility. Surveys show increased allocation to private debt by family offices and institutional investors.
Steady growth of private credit AUM projected to reach $1.46 trillion by 2025
Private credit AUM is projected to grow 73% to reach $1.46 trillion by 2025, making it the second fastest growing alternative investment after private equity. Dry powder levels remain high with $300 billion targeted by 592 private debt funds. The asset class has moved mainstream with significant allocations from institutional investors and family offices.
Higher returns than traditional fixed income with median IRR above 20%
Private credit generates returns well above public high yield debt and bonds, with median IRR above 20%. It provides enhanced yield over traditional fixed income. Strategies range from lower risk ‘capital preservation’ to higher returning distressed credit.
Increased allocation by family offices and institutional investors
Preqin reports 23% of family offices surveyed plan to increase allocations to private debt due to attractive returns. Two-thirds intend to raise exposure. Among US pension funds, private credit allocations almost doubled over 2020 to $50 billion.
Diversification and inflation hedging properties
Investors see private credit as an effective portfolio diversifier that reduces volatility. It has low correlation to public debt and equity. It also provides an inflation hedge through floating rate exposure and real asset collateral.
Private credit presents a compelling growth opportunity. With projected rapid AUM expansion, attractive returns exceeding 20% IRR, and diversification benefits, it is gaining strong interest from family offices and institutional investors alike.