S&P sees private credit growing but decelerating in 2024

S&P Global Ratings expects that the private credit market will continue to grow in 2024, although more slowly than in 2023.

Growth in private credit will continue in part because larger companies will be entering the market, S&P said in its latest monthly private market newsletter. But deceleration will occur because of the uncertainties that surround interest rates, the ratings agency added.

The report is based on interviews with eight experts on the markets. David Tesher, head of North America credit research for S&P Global Ratings said: “How these risks manifest depends on where a borrower is in its life cycle and, equally as important, on broader credit conditions. For North America, we think tight financing costs, the potential for a US recession and persistent cost pressures are the preeminent prevailing risks.”

There is a general expectation that the US Federal Reserve is executing a pivot from tightening interest rates to loosening. The great uncertainty is the speed of that pivot. When will the loosening get under way? In the meantime, in the words of Andrew Watt, head of financial services, infrastructure and alternative asset ratings for the Americas: “Lenders and borrowers in this market continue to work together to minimise bankruptcies and other traditional payment defaults by executing amendments to waive covenants and address near-term liquidity challenges.”

In addition, S&P said the current climate would likely lead to an increase in alternative investment funds’ use of tools like NAV facilities.

Andrey Nikolaev, managing director of financial institutions and alternative funds for Western Europe, said: “While dry powder in the private markets remains high, we believe LPs will remain selective and look for stronger track records and diversified offerings among GPs – thereby increasing competition for capital. Given the scarcer capital and funds’ difficulty to exit investments quickly, we expect both GP- and LP-led secondary strategies to be in high demand.”