New Report: Private Credit is a Safe, Stable Option that Strengthens Companies Throughout all Economic Conditions
Washington, D.C. – The American Investment Council (AIC) released a report today, authored by PitchBook, highlighting the success of private credit managers in enhancing the health and performance of American businesses.
Private credit has increased access to capital for small- and medium-sized businesses across the nation. Private credit managers are demonstrating a strong performance, consistently yielding returns above 10% – significantly higher than traditional fixed income investments. [Graph 4]
“Thousands of small- and medium-sized businesses across the nation depend on private credit,” said AIC President & CEO Drew Maloney. “Private credit not only strengthens promising businesses that need capital to grow but also provides a lifeline to underperforming businesses, helping them get back on track. Private credit’s strong performance is a clear indication that investors and businesses see the value of this asset class.”
Key Insights from the Report:
- Weathering the Storm: The industry has provided necessary funding to businesses that are underperforming, aiding their potential turnaround. In particular, private credit has helped businesses during recent financial crises — including the COVID-19 pandemic and the collapse of Silicon Valley Bank. Private credit managers stepped in to provide much-needed capital to businesses and offer industry expertise to help them weather the storm.
- Impressive Growth: The private credit industry had considerable growth: by the end of 2022, private credit had $1.5 trillion in assets under management (AUM), a rise from just over $100 billion in 2005. [Graph 1]
- Dry Powder: The private credit industry has a considerable amount of dry powder, which refers to unallocated capital that firms have on hand for businesses when they need it or when opportunities arise. The industry had over $434 billion in dry powder by the end of last year. [Graph 2]
- Safe and Stable Financing: Private credit provides stable, critical access to capital during economic downturns. The report cites the Federal Reserve’s Financial Stability Report from May 2023, which concluded that “vulnerabilities posed by private credit funds appear limited.”
- Low Default Rates: The report cites Proskauer’s Q3 2023 Private Credit Default Index, which concluded that the private credit industry had an overall default rate of 1.41% for the third quarter of 2023, a decrease for the second straight quarter. In Q2 and Q1, the overall default rates were 1.64% and 2.15%, respectively.
- Direct Lending: “Direct lending” activity – when lenders work directly with businesses – has continued to grow. Many of these investments are in small- and medium-sized businesses and unrated companies. Private credit provides a complementary source of funding to businesses that cannot secure sufficient funding from traditional lenders. [Graph 5]
- Special Situations: Distressed debt, often referred to as “special situations debt,” has also grown considerably. In this case, lenders work with businesses that are unprofitable, struggling, or too complex for traditional lenders to loan to them. Because private credit firms work hand-in-hand with private companies, they develop sturdy, reliable relationships with their management teams and provide valuable industry expertise and mentorship. Over the past decade, $126.2 billion has been raised by special situations lenders. [Graph 6]
The full report can be found here.