Credit posts better returns than buyout funds amid rising rates: Hamilton Lane

One of the biggest draws to private credit for institutional investors has been the potential for higher returns in a lower-return world; another is the floating-rate nature of private credit investments.

Such investments perform better in a backdrop of rising interest rates, according to data from investment and advisory firm Hamilton Lane. Among a variety of alternative investment strategies, credit origination and distressed debt funds actively investing during a period of increasing rates returned 12.4 percent and 14.18 percent, respectively.

“In a rising rate environment, there are a number of dynamics at play when looking at how much rising borrowing costs could squeeze a company’s cashflow,” said Drew Schardt, a managing director and head of private credit at Hamilton Lane. “You can’t look at it solely through that lens.”

Among other factors worth considering are several relevant financial ratios, he said, including fixed-charge coverage metrics and overall corporate margins, which are much healthier than before the global financial crisis.

Many elements can influence a company’s ability to service its debt, but rising rates mean elevated borrowing costs. That raises the importance of underwriting and picking the very best companies in which to invest.

“As long as LPs are invested with firms who are making good credit selections, returns would increase given your portfolio should stay in good shape,” CVC Credit Partners chairman Hamish Buckland said. “Rising rates just mean credit selection is critical. In a low-rate environment, weak companies can still survive.”