Lombard Odier forecasts strong demand for private credit despite lower returns
Lombard Odier expects to see strong investor demand for private credit this year, despite lower returns due to falling interest rates.
The Swiss private bank noted that 2023 was “a bumper year for the industry”, with a record number of funds in the market and the largest ever loan, of $5.3bn (£5bn).
“The retreat of banks from corporate lending explains part of this remarkable growth,” the firm said in an analysis on its website. “Private credit markets have also been driven by investors’ desire to capitalise on rising interest rates, since rates on private loans are usually floating, and offer higher yields than coupons from comparably rated public bonds.”
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Central banks on both sides of the Atlantic are widely expected to lower interest rates later this year, as inflation cools.
Lombard Odier predicts that falling rates will pressure private credit returns. However, it added that “appetite from investors and asset managers to branch into the asset class remains solid. Private credit returns are not correlated to market sentiment and can hence offer stability and diversification benefits.”
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The firm said that the “rapid rise” of the industry and the possibility of higher default rates amid economic uncertainty should be monitored, but said that the risks look manageable.
“Private loans are typically secured against the borrowers’ assets, while default rates remain contained for now,” the firm added.
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The $1.7trn private credit market is forecast to swell to €2.8trn by 2028, according to Preqin.
Recent research from the industry data provider also found that the largest private debt funds are dominating the market.
The top 10 funds took over half of funds raised during the first three quarters of 2023, Preqin data found.
According to Preqin analysts, this suggests that investors value the economies of scale that accrue to larger funds, and are looking for experienced managers with a track record.