The days of easy profits in private credit are waning as competition intensifies and defaults increase, according to a report by Bloomberg citing key industry players speaking at the Milken Institute Asia Summit on Thursday.
The report quotes Matthieu Boulanger, Head of Europe at HPS Investment Partners, as noting that the “illiquidity premium” for private credit providers – which once reached as high as 350 basis points – has now fallen to around 1%-1.5%. This decline reflects heightened competition and changing market conditions.
The discussion took place against the backdrop of Federal Reserve Chair Jerome Powell’s decision to implement an outsized interest-rate cut aimed at ensuring a soft economic landing, which could further drive down borrowing costs.
Defaults in the private credit market are now approaching 3%-5%, driven in part by covenant breaches and modifications. Patrick Dennis, Co-Deputy Managing Partner at Davidson Kempner Capital Management, emphasised that “kicking the can down the road between borrower and lender” is contributing to the problem. He warned that the severity of defaults is one of the biggest risks being evaluated in the market.
Katherine Grawe, a portfolio manager at Virginia Retirement System, highlighted that while challenges exist, there are still attractive opportunities, particularly as banks scale back lending. These opportunities lie in sectors like commercial and residential real estate, asset-backed finance, and synthetic risk transfers from banks.
While none of the panelists foresaw an end to private credit, many acknowledged that the landscape is evolving due to increased competition and rising risks.
