BlackRock predicts more performance dispersion in private debt
BlackRock has predicted more performance dispersion in private debt next year, requiring more granular credit selection.
Research from the world’s largest asset manager said that this year’s vintages should benefit from additional clarity on monetary policy, growth in the US, and a still-attractive backdrop of yield support.
“In aggregate, corporate borrowers in the private debt market have demonstrated notable resilience. But that resilience is not equal in all parts of the market,” the firm’s 2025 Private Markets Outlook said.
“Covenant defaults declined to 2.6 per cent over five consecutive quarters ending 30 June 2024, according to the size weighted covenant default rate for the Lincoln International Proprietary Private Market Database, which includes 5,200 US companies. But the instance-weighted default rate, which illustrates the stress faced by smaller borrowers, tells a different story. It ended the same period at 7.5 per cent, up from six per cent a quarter before.”
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BlackRock also predicted that dispersion by sector will continue in terms of covenant default rates. It highlighted the consumer sector as an example, which has generated higher covenant default rates in recent quarters as consumers contend with higher inflation.
“Finally, trends among vintages will also be important to monitor in the year ahead,” the report added. “Relative to more recent vintages, we expect to see increased amendment and covenant default activity among the vintages that were formed in an environment of exceptionally low interest rates.”
There is still plenty of room for growth in the private debt sector, according to BlackRock.
“At $1.6tn in global assets under management at present, the asset class accounts for 10 per cent of the $16.4tn alternative investment universe,” BlackRock said. “However, private debt is taking on more fundings previously executed in the public markets, which increasingly focus on deals that are prohibitively large for most middle-market companies.”
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BlackRock also predicted greater allocations to private markets from the wealth channel in the coming years.
“Allocations to private markets in wealth management remain in their infancy – just one to two per cent for individual investors and nearly zero for defined contribution systems globally,” it said. “Even modest increases will drive growth.”
BlackRock has teamed up with Partners Group to provide advisors with access to private equity, credit, real assets, and liquid alternatives within a model portfolio.
Additionally, BlackRock said it expects 2025 to be a dynamic investing environment, with higher fiscal spending and deficits, along with structurally higher inflation and interest rates.
“The elevated pace of growth, which has prevailed in the US for much of 2023 and 2024, has been a significant contributor to the resilience of private debt, as well as borrowers’ ability to navigate a higher-cost-of-capital environment,” the report said. “For private debt investors, robust economic expansion can reduce the risk of a significant increase in defaults and credit losses.”
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