Private credit returns have recently outpaced private equity, as shown by State Street data from the second quarter, but this advantage may soon wane with the Federal Reserve’s shift toward easing monetary policy, according to a report by Bloomberg.
The report cites Nan Zhang, head of product implementation and alternative investment research at State Street, as noting that “private debt, especially floating-rate debt, typically benefits from rising interest rates,” and expects that private debt’s outperformance might diminish as the Fed continues with rate cuts.
The loosening of credit conditions is likely to help private equity by easing borrowing constraints, which have slowed deal-making, while lower credit costs could also relieve pressure on portfolio companies that had taken on costly leverage amid high borrowing costs, smoothing the path for exits.
Private credit’s edge over buyout funds has been evident in seven of the last 10 quarters, partly due to direct lenders’ floating-rate loans, which provide steady interest payments. In the second quarter, private debt saw returns of 2.18%, while buyouts posted 1.47%, according to State Street’s index.
In the broader credit market, where insurance companies and pension funds seeking high returns have driven yields lower, private debt continues to attract investors. Apollo Global Management’s co-head of European credit, Tristram Leach, highlighted that senior credit strategies have consistently earned double-digit returns this year, outperforming public markets.
While falling interest rates could mean fewer defaults for private credit borrowers, they are also expected to benefit private equity. Moody’s analyst Christina Padgett observed that lower rates would support leveraged buyouts (LBOs) by boosting cash flow and valuations, while encouraging investor appetite for yield.
