Percent, a firm engaged in the private credit marketplace, released its 2024 private credit outlook, summarizing the key macroeconomic trends from 2023 that propelled the private credit asset class forward and providing insights on what investors can expect for the year ahead. According to the outlook, amidst an uncertain future environment, the economy has held steady and private credit continues to be top choice for alternative financing
“2023 showed the power and potential of private credit as a critical source of debt capital to various companies and a prudent way for investors to diversify portfolios and outperform amidst economic volatility,” Nelson Chu, founder and CEO of Percent, said. “The large amount of dry powder across allocators indicates momentum will only continue to accelerate as firms continue to lean into the asset class. We are already seeing a variety of interesting trends on the Percent platform foreshadowing the ways allocations and deal types will shift into 2024.”
Following several tailwinds pushing private credit into the spotlight in 2023, the asset class now stands at $1.3 trillion in assets under management, representing an estimated 25% of “dry powder” available for investment. According to Percent’s findings, not only will private credit continue to thrive, but there are certain areas to pay close attention to. Key private credit predictions and investor insights for 2024 outlined in the report include:
- Investors will prioritize collateral quality and credit enhancements and demand more spread for riskier deals. Active investors on Percent’s platform have bid up yields on most private credit transactions in 2023. For 2024, Percent predicts weighted average APYs will continue to marginally increase for corporate loan deals while stabilizing or slightly decreasing for asset-based financing transactions that generally carry more credit enhancements.
- Borrowers and underwriters will look to raise more corporate loans across venture debt and cash-flow lending deal types. New and known participants will turn to these deal structures that have benefited from a wave of new investor interest, given they tend to offer higher rates than asset-based financings and higher premiums than their counterparts in the bond or leveraged loan markets.
- Established borrowers with asset-based deals will continue to source growth capital, specifically technology-enabled originators in the small and medium business lending and consumer lending spaces. Percent has actively seen an increase in demand for lender finance products, helping established lenders source additional debt capital to expand loan books.
- Private credit funds and related providers should be able to withstand a weaker economy as long as they retain discipline in their underwriting standards. Although 2024 may yield an increase in defaults, there will be plenty of opportunity for private credit firms to continue to step in and provide capital for high credit quality lower-middle market companies that are finding it difficult to access funding from banks or the broader capital markets for a variety of non-credit-related reasons.
- Investors should consider setting aside an allocation of their portfolio for private credit and other alternative investments going into 2024.This allocation would provide investors with added diversification across asset classes and lower correlation of their portfolio returns in relation to public equity and fixed income markets.
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“The meteoric growth of private credit these last several years could not have been more well timed given all of the core infrastructure we have built here at Percent to support this asset class going forward,” Prath Reddy, president at Percent, said. “For investors, we equip them with the tools and information that they need to conduct their due diligence, participate in real time Dutch auctions and actively manage the diversification in their private credit portfolios. At the same time, we expand the opportunities for both borrowers and underwriters to grow and scale their organizations by offering a transparent, work-flow oriented technology solution to raising and managing private debt capital. We have been working hard to modernize private credit for this very moment and 2024 will be our strongest year to date.”
