(Bloomberg) -- Easy profits in private credit are nearing an end as competition intensifies and defaults rise, some of the biggest participants in the industry said at the Milken Institute Asia Summit on Thursday.
The “illiquidity premium” for providers was once as much as 350 basis points, said Matthieu Boulanger, head of Europe at HPS Investment Partners. “Right now, it’s more like 1%-1.5%.”
The tempered views came as Federal Reserve Chair Jerome Powell ruled for an outsized interest-rate cut in an effort to ensure a soft landing — a move that could further lower the cost of borrowing.
Defaults in private credit are nearing 3%-5%, partly due to covenant breaches and modifications and “kicking the can down the road between borrower and lender,” Co-Deputy Managing Partner of Davidson Kempner Capital Management Patrick Dennis said.
“From a severity perspective, I think this is the biggest risk in the market that we’re trying to evaluate,” Dennis added.
Katherine Grawe, a portfolio manager at Virginia Retirement System, said her organization is still seeing attractive “scale opportunities” as banks reduce lending. Those opportunities come in commercial and residential real estate, asset-backed finance and synthetic risk transfer from banks, she said.
While none of the panelists predicted the end of private credit, some pointed to an evolution driven by excessive competition.
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