By Brad Schneider, Managing Director, Head of Private Credit
Finally, at long last, the era of “higher for longer” seems to be at an end. The Federal Reserve is widely expected to begin cutting interest rates as soon as Sept. 18. While investors and the market have been eagerly anticipating this moment, many private credit investors may be a bit more wary. With interest rates on the downward trajectory, what will that mean for private credit returns? Although past performance is not indicative of future results, private credit has offered competitive returns compared to some other fixed income securities, and we at Cresset Partners believe it will continue to do so in a lower interest rate environment.
We feel the near- and long-term trends for private credit are generally favorable. While declining base rates can be expected to modestly impact private credit returns, those returns should still substantially outpace more traditional fixed income investments. For historical context, quarterly income from direct lending has proven to be consistently strong in a variety of interest rate environments, between 9% and 12% annualized, over the last two decades.[1] Investors should always consider relevant risks to private credit, such as credit defaults, economic downturns, and regulatory changes, as past performance should not be viewed as a predictor of future results. Manager due diligence is also key. Investors should work with a private credit fund that has the expertise and portfolio quality to help meet their investment objectives.
If interest rates do decline, we believe there are “silver linings” that could be beneficial to private credit. A reduction in interest rates could lead to a boost to the valuations of private equity-owned companies, which may provide the long-awaited spark for increased M&A activity. A return to normalized deal flow could ease competitive pressures, and that may lead to improved loan pricing terms and accelerated deployment of capital, which are all positives for private credit investors. Lower interest rates also generally lead to reduced borrowing costs for companies, which could spur increased demand for private credit as firms look to refinance existing debt or fund new projects at more attractive terms.
In fact, the fourth quarter of 2024 could be the best deal volume period of the year, and we believe the outlook for middle market lending going forward into 2025 and beyond is equally encouraging.
Past performance is no guarantee of future results.
Cresset refers to Cresset Capital Management, CP Parent, LLC, and all of their respective subsidiaries and affiliates. Cresset Asset Management, LLC, also conducting advisory business under the name of Cresset Sports & Entertainment, provides investment advisory, family office, and other services to individuals, families, and institutional clients. Cresset Partners, LLC, provides investment advisory services strictly to investment vehicles investing in private equity, real estate, and other investment opportunities. Cresset Asset Management, LLC, and Cresset Partners, LLC, are SEC registered investment advisors.
[1] Source: Cliffwater, Federal Reserve Bank of New York and Golub Capital Internal Analysis
