Percent, a private credit platform, released the findings of a recent study completed with Coalition Greenwich on trends and data in private credit, demonstrating a seismic shift to private credit market investments.
The study, titled “Coalition Greenwich 2023 Private Credit Market Structure Study,” included asset managers, hedge funds and wealth managers (family offices and RIAs) in the U.S., with the majority of respondents managing up to $250 million in assets for their clients. According to research results, 63% of respondents intend to increase their allocations to private credit due to predictions that the asset class will outperform other investment opportunities, including U.S. government bonds and U.S. corporate bonds (expected by 70%), commercial real estate (expected by 62%) and residential real estate (expected by 44%). The study supports current estimates from Preqin that the private credit market could more than double to $2.7 trillion by 2026.
Facing 15-year high interest rates and 2023’s banking crisis, many small and mid-sized corporate borrowers struggle to get the funding they need to stay afloat. As larger banks face more stringent capital requirements, this dynamic brings asset managers, wealth managers and family office investors into the market, beyond the traditional large asset managers. This shift will provide crucial funding for small and medium-sized businesses worldwide, while at the same time bringing in yields for investors of over 10%.
“The combination of the rising interest rates and the banking crisis this year made it almost impossible for small and mid-sized corporate borrowers to get the funding they need, creating an increased spotlight on private credit,” Nelson Chu, founder and CEO of Percent, said. “The study reinforces the trends we’ve seen on our platform, further emphasizing how the yields within the private markets are proving to be incredibly attractive. Percent is providing that much-needed technology infrastructure, data and standardization with increased access to further accelerate growth.”
Along with market forces, technology is playing a pivotal role in making private credit accessible to smaller institutions, wealth managers and high-net-worth retail investors. The research indicates that increased access, transparency and standardization have been the key for investors budgeting more allocations to private credit markets. 57%of the family offices participating said more easily accessible data on private credit investments is needed, with 72% of asset managers and 67% of RIAs agreeing. Wealth managers also indicated optimism around the creation of more private credit liquid alternatives, which could provide lower fees and improved liquidity, with more access to data on private credit investments and the creation of a standardized secondary market for individual loans proving to be the favored long-term solutions to improving access to the asset class.
Other key points from the study include:
- 50% of respondents already have increased their allocations in this past year.
- The majority acquired their private credit exposure through funds offered by large asset management, but public liquid alternatives, such as ETFs and mutual funds, were also common.
- 71% cite that the primary driver for investing in private credit is portfolio diversification; particularly for financial advisors whose clients are often looking to add returns to their portfolio that are uncorrelated to public equity and fixed-income markets. Income generation is cited as the second highest factor (70%).
- Data is king. The vast majority of respondents indicated a reliance on data provided by the managers they invest with (78%), indicating a need for more data standardization. To ensure proper risk management, multiple data inputs are crucial to investment strategy and tracking over time.
- 70% cited liquidity as the number one perceived barrier to entry, with other barriers mentioned being high manager fees (56%), less transparency and regulation compared to other public markets (38%) and difficulty in sourcing investment opportunities (30%) among others.
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“The private credit market offers investors more opportunities to generate income higher than obtained in the public market, often with a similar risk profile,” Kevin McPartland, head of research at Coalition Greenwich Market Structure and Technology, said. “While typically favored by the larger investors such as KKR and Blackstone, we’re now seeing unconventional private credit investors entering this asset class at an unprecedented volume.”
