Could rate cuts be welcomed by private credit managers?
Despite the higher interest rate environment being hailed as a “golden age” for private credit, it has also created challenges for the market.
Most private credit funds issue floating rate debt and have therefore benefited from rising rates. But this has also made deploying capital more difficult, at a time when new funds have increased the dry powder available. According to S&P Global, private credit funds had more than $400bn (£315.2bn) in dry powder globally as of September.
But private equity deals have been harder to come by due to an increase in the cost of financing transactions. Globally private equity deal volume was down 20 per cent, according to PitchBook.
Read more: BoE warns of future trouble for private credit
Many private credit funds have therefore either focused on continued lending to existing borrowers, to fund add-on deals, or working on amendments and extensions with portfolio companies that have come under pressure from higher interest rates and rising costs.
“The longer the rates continue to stay high, the more pressure the portfolios of investments will suffer,” said Julien Dubar and Marie-Laure Mounguia at EY Luxembourg.
Read more: Abrdn says 2024 should be the year for fixed income
“Furthermore, several old vintage funds launched in a low-rate environment are highly levered and will soon search for a refinancing solution, creating increased stress on the market.”
Therefore a potential cut in interest rates may be a welcome development for some managers. It could kickstart the M&A markets, creating more opportunities for lenders and it will take some of the pressure off borrowers.
“All-in yields will go down as base rates are expected to decrease in 2024,” said Richard Olson, managing director at Lincoln International. “This will favourably impact portfolio companies and lead to more borrowing capacity, which might catalyse more M&A. There are a lot of favourable conditions that could materialise towards the back end of 2024.”
Read more: Global private debt fundraising in 2023 slightly down from 2022