Forward Guidance The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba
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Feb 16, 2024 Financial expert Andrzej Skiba discusses the rising risks in private credit lending. Topics include the definition of private credit, the risky nature of the deals, the lack of data on performance during defaults, the illiquidity of the asset class, and the interplay between private credit and the rest of the fixed income universe.
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Private Credit Explained
- Private credit involves lending to companies outside public markets, offering double-digit returns and no market-to-market accounting.
- It has grown rapidly due to regulations and investor interest in higher returns.
Private Credit Risks
- Private credit focuses on smaller, weaker companies than public markets, making them more vulnerable during economic slowdowns.
- High interest rates disproportionately strangle private credit companies due to floating debt.
Private Equity's Role
- Private equity firms often own companies financed by private credit, using high leverage to boost returns.
- This leverage, often 6-7 times profits, leaves little room for economic downturns.