Your Money
In the wake of the 2008-2009 financial crisis, many banks either pulled back from lending or tightened their lending standards (often at the encouragement of regulators.) This reduced the amount of funding available to businesses. The debacles earlier this year at Silicon Valley Bank and First Republic Bank made things even tighter. This opened the door for the expansion of a different funding source: private credit.
Private credit loans, which hedge funds and large asset managers often arrange, typically come with an interest rate higher than a bank might offer with stricter covenants on the borrower. But for cash-strapped companies who might not qualify under banks' relatively stricter lending standards, taking out a private loan can be an attractive, maybe only, option.
On the other side of these transactions, the loans' relatively high-interest rates make them attractive to a range of investors looking for yield, from large institutions like insurance companies to individual investors. Nonetheless, while the loans have additional protections for the lenders, they still come with potential default risk, particularly given that many borrowers are less creditworthy than other corporate borrowers and higher interest rates make loan repayments more onerous.
The flood of cash entering vehicles to take advantage of this trend ($1.5 Trillion in 2022, doubling the 2018 level) makes diligence and manager research more important than ever. At PWM, we embrace the private markets as a true diversifier to the public markets, and private credit plays a role in that. We pay particular attention to the size of the lender, its underwriting standards, its monitoring and workout process, and turndown ratio, among other criteria.
The New Kings of Wall Street Aren't Banks.
by Matt Wirz
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