BlackRock Investment Institute favors private credit over public as the banking sector turmoil makes traditional lenders cautious, opening up new opportunities in the funding market.
“We think private credit could help fill a void left by banks pulling back on some lending and offer potentially attractive yields to investors,” BlackRock strategists led by Wei Li wrote in a note, adding that the preference is over a horizon of five years and longer.
Private credit has been booming as lending conditions turned tight in the wake of Silicon Valley Bank’s failure and Credit Suisse Group AG’s shakeup. In the U.S., some of the biggest names in private investing including Apollo Global Management Inc., Blackstone Inc. and Carlyle Group Inc. have angled for openings as regional lenders came under pressure and bank lending slumped to the lowest since 2008.
Yields in direct lending, a subset of private credit, have risen to their highest since at least 2016 to nearly 12 percent, BlackRock data show, while those for U.S. high yield and investment grade credit have fallen from their recent highs of almost 10 percent and 6 percent, respectively.
“These higher yields may better compensate investors for the risks we see ahead even after factoring in lower credit quality,” BlackRock strategists wrote. “The rising interest rate environment and increased competition for deposits will put pressure on banks,” and make room for non-bank lending and private credit, they said.
Global loans volume — which represents how much banks are lending to companies — has decreased 37 percent this year, according to Bloomberg-compiled league table data, adding to a 13 percent drop in 2022.
