Mid-Year Private Credit Viewpoints
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The following mid-year update assesses the current state of the market and builds on our earlier private credit viewpoints for 2024.
As expected, the Federal Reserve kept interest rates unchanged at its July meeting, and talk has turned to an anticipated September rate cut. While we wait, we know that higher-for-longer interest rates will pressure certain borrowers, but our view is that private credit is generally well-positioned.
Structurally, transactions have continued to see strong equity contributions and lower loan-to-values as a percentage of enterprise value. Senior secured deals in particular are nicely positioned due to their seniority in the capital structure and the prevalence of financial maintenance covenants. Unlike broadly syndicated loans that trade hands, private credit tends to be more long-term in nature. As a result, we expect lenders and borrowers to continue working collaboratively in a higher interest rate environment to prevent defaults.
Pivoting to deal activity, M&A, debt maturities, dividend recapitalizations and modest LBO activity are fuelling financing demand. Anecdotally, in the first half of 2024, Hamilton Lane saw $7.7 billion in deal flow, which surpassed 1H 2023 volume by 44%, and we don't see any signs of that slowing down.
HL Credit Deal Flow
$mm
And while LBO volumes are not yet back to pre-2022 levels, we are cautiously optimistic that change-of-control transactions will modestly continue to build for a couple of reasons. First, LPs are demanding liquidity. Distributions as a percentage of NAV are down relative to the long-term private markets average of 23% and hold periods are getting longer for buyout deals. Secondly, borrowing costs have softened as capital markets activity has picked up and investors have improved clarity on macroeconomic conditions and central bank policy. With inflation cooling towards its 2% target, it's likely that a lower Fed benchmark rate will lead to the continued easing of borrowing costs for private equity buyers. Regardless of LBO activity, we believe private credit transaction volume is poised to continue in the second half of 2024, particularly for credit GPs with scale and robust sourcing relationships.
Annual Private Equity and Credit Distributions
Private Credit on the Rise
Globally, we are seeing institutions rebalancing from traditional fixed income into private credit as the asset class has demonstrated attractive performance over long periods on both a relative and absolute basis. As individual investors become more familiar with the asset class, we expect them to lean more into private credit too.
Overall, we believe private credit is favorably positioned to continue delivering consistent performance and yield to investors amidst an evolving landscape. In a higher-for-longer interest rate environment, attractive yields will continue to drive investor interest in the asset class.
Credit: This strategy focuses on providing debt capital.
Growth Equity: Any PM fund that focuses on providing growth capital through an equity investment.
Private Equity: A broad term used to describe any fund that offers equity capital to private companies.
VC/Growth: Includes all funds with a strategy of venture capital or growth equity.
There are a number of factors that can affect the private markets which can have a substantial impact on the results included in this analysis. There is no guarantee that this analysis will accurately reflect actual results which may differ materially. These valuations do not necessarily reflect current values in light of market disruptions and volatility experienced in the fourth quarter of 2020, particularly in relation to the evolving impact of COVID-19, which is affecting markets globally.
The information contained in this presentation may include forward-looking statements. Forward-looking statements include a number of risks, uncertainties and other factors beyond our control which may result in material differences in actual results, performance or other expectations. The opinions, estimates and analyses reflect our current judgment, which may change in the future.
All opinions, estimates and forecasts contained herein are based on information available to Hamilton Lane as of the date of this presentation and are subject to change. The information included in this presentation has not been reviewed or audited by independent public accountants. Certain information included herein has been obtained from sources that Hamilton Lane believes to be reliable but the accuracy of such information cannot
be guaranteed.
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As of August 28, 2024