Private Credit has seen unprecedented growth in demand in recent years. Unlike most bank credit, private credit solutions are more customisable in terms of the size, type, or timing of transactions. Building on this, Morgan Stanley makes a case for investing in private credit. It does so by stating that this type of lending is in the form of floating-rate investments that offer real-time interest rate protection in contrast to fixed-rate bonds.
Ashwin Krishnan, Co-Head of North America Private Credit at Morgan Stanley Investment Management, states that private credit is preferable during periods of mid-recession fears and constrained commercial bank lending. “The size of the private credit market at the start of 2023 was approximately $1.4 tn, compared to $875 bn in 2020, and is estimated to grow to $2.3 tn by 2027,” informs Morgan Stanley.
Krishnan lists direct lending, mezzanine, second lien debt, preferred equity, distressed debt, and special situations debt as the six main forms of private credit. “Investors have increasingly added private credit to their portfolios as a potentially higher-yielding alternative to traditional fixed-income strategies,” explains Krishnan. He further adds that since the beginning of the Global Financial Crisis (GFC), direct lending has provided higher returns and lower volatility compared to both leveraged loans and high-yield bonds.
Additionally, the investment banking company elucidates that a private form of credit usually offers the possibility for current income from contractual cash flows. Morgan Stanley also contends that private credit has depicted lower default rates when compared to public credit over time and offers the possibility for current income from contractual cash flows. “It may be possible to create highly customised portfolios of strategies to blend risk-adjusted returns across a variety of private-credit strategies,” opines the investment bank as it explains the advantages of private credit.
Considering the relative resilience that private credit has shown during the COVID-19 pandemic, Morgan Stanley sees it as offering better protection against losses.
On other options presented by investing in private credit, the investment bank says, “We expect to see issuers increasingly turning to the private credit market for refinancing solutions.” To conclude, Morgan Stanley advises investors to adopt a proactive approach and analyse the companies well. As for companies, the primary focus should be liquidity management.
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