Filling the void with private credit

Jeff Haas, President, SR Alternative Credit
October 3, 2022

Over the last decade, increasingly stringent bank regulations have made it unfeasible and uneconomical for large financial institutions to lend to small and medium-sized businesses (SMEs). Moreover, there has been a steady decline in the number of commercial banks.  These factors have negatively impacted SMEs and created a need for an alternative source of capital.  Private credit managers, like SR Alternative Credit, have increasingly taken advantage of this attractive supply and demand dynamic by providing capital to SMEs to fund growth and other initiatives.

Why does private credit make sense in today’s market?
We believe there are two main benefits for private credit investors. First, while interest rates have increased, there is still an illiquidity premium that can be captured by investing in private credit. Private credit products have the potential to yield more than fixed income instruments in the public markets primarily due to the illiquidity of the underlying loan, as private credit lenders do not necessarily face higher issuer, interest rate or market risks.

Second, lessons learned from the global financial crisis have indicated that there may be a less severe downturn in certain private credit activities during a recessionary period versus other credit products such as bank loans or high-yield bonds.  Private credit is an attractive asset class due to its generally low correlation to other income-producing assets typically found in institutional portfolios. Specifically, returns associated with private credit do not typically move in tandem with other assets, such as public equities, private equity investments or public bonds. For an institutional investor, this characteristic can increase portfolio diversification and potentially reduce volatility.

Overall, institutional adoption of the private credit asset class has intensified as investors seek higher and more durable returns from credit investments in an increasingly challenging and volatile market environment.  Due to the complexity of private credit deals and the various inherent risk factors, we believe selecting an experienced private credit manager that has operated through multiple credit cycles is critical.

The views expressed are those of Spouting Rock Asset Management platform, as of October 1, 2022, and are not intended as investment advice or recommendation.  For informational purposes only.  Investments are subject to market risk, including the loss of principal.  Past performance does not guarantee future results.  There can be no assurances that any of the trends described will continue or will not reverse.  Past events and trends do not imply, predict or guarantee, and are not necessarily indicative of future events or results.  Investors cannot invest directly in an index. 

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