Recent scrutiny of business development companies (BDCs) and corporate direct lending has contributed to a “broader change” in market conditions for private credit, with the asset class set to benefit from multiple “tailwinds”, Neuberger has argued.
Recent redemptions in the BDC market have subjected the wider private credit market to increased scrutiny, yet some appear to be overlooking the “nuance” that the entire BDC universe, listed and non-traded combined, amounts to only around $500bn (£372bn) of the multi-trillion-dollar private credit market, according to Louay Mikdashi, co-head of multi-sector private credit, and Jonathan Shahrabani, chief operating officer, research strategies.
In a recent blog, both Shahrabani and Mikdashi said redemption activity in non-traded BDCs does not appear to have been driven by investment performance, with many vehicles delivering high single-digit returns last year. Rather, the redemptions reflect other factors, including investor liquidity needs and a broader reassessment of portfolio positioning.
However, both argued that the private credit market is more “diverse” and “resilient” than recent headlines suggest, with the outward movement of retail flows contributing to a broader shift in market conditions. They said several factors could provide tailwinds for non-traded BDCs and private credit more broadly, including capital flows, healthy secondary markets and continued bank support.
Read more: Private credit weathers scrutiny as managers reject crisis narrative
Institutional private credit dry powder has remained significant, at around $600bn in committed but undeployed capital, with this capital potentially offsetting outflows from semi-liquid vehicles, both said.
Alongside this, the rapid pace of retail inflows in recent years put pressure on spreads and, in some cases, compressed returns. However, spreads on newly originated credit have now started to widen in parts of the market.
Shahrabani and Mikdashi also said another “tailwind” behind the changing market conditions is the growth of secondaries, which is enhancing liquidity in private credit and creating new access points to the asset class for investors.
Alongside this, a reasonable question is whether stress in the private credit market could affect the appetite of bank lenders, given how much lending to non-depository financial institutions has increased in recent years. However, the data so far does not point in that direction, Shahrabani and Mikdashi said.
“We would not overstate the opportunity, and there are real uncertainties ahead,” both Shahraban and Mikdashi said. “But the picture in certain parts of this market is, in our view, more interesting than the headlines suggest.”
Read more: Private credit growth not ‘derailed’ despite volatility and liquidity risks
