Is private credit preventing a recession in the U.S.?
That’s exactly what Canaccord Genuity's chief market strategist, Tony Dwyer, believes. According to Dwyer, the only reason the U.S. hasn’t tumbled into recessionary territory is because the private credit market has been supporting companies that otherwise wouldn’t have access to capital.
While many hail the resilience of the U.S. consumer–claiming that the excess savings accumulated during the pandemic is what is keeping the economy afloat–Dwyer points to the resiliency of U.S. companies instead, which is helping keep unemployment low (and putting more money into the pockets of those equally-resilient U.S. consumers).
"There had to be a source of capital for companies to have access to money when you couldn't get it anywhere else,” Dwyer is quoted as saying. “And for the first time in history, we have private credit.”
A $1.7 Trillion Safety Net (and Growing)
According to data from the Federal Reserve, the private credit market has gone parabolic with over 550% growth in the last 15 years. Resting at a mere $300 billion in 2009, the once-niche sector of finance is now going mainstream, currently sitting at a $1.7 trillion valuation and expected to grow to $3.5 trillion by 2028.
The meteoric growth is largely attributed to the dual drivers of regulatory changes in the U.S. (where, due to capital constraints, banks are no longer able to issue loans to otherwise creditworthy applicants), coupled with investors searching for yield amidst excess volatility in the stock and bond markets.
The regulatory environment isn’t likely to change anytime soon, and while volatility is impossible to predict, geopolitical risk, commodity price swings and persistent inflation are likely to place continued downward pressure on public markets. Small wonder why so many are predicting that private credit’s growth spurt will continue for years to come. There is still plenty of total addressable market to be captured here–even with that 500+% surge, U.S. private credit borrowing represents less than 1% of U.S. bank assets.
For investors interested in diversifying into private credit, a lingering question is how to gain exposure to creditworthy deals.
Experience and Selectivity
As the private credit sector expands, so does the pool of businesses looking to raise capital. Many such businesses are growing firms in niche sectors that are often overlooked by banks. For example, Heron Finance has made investments into private credit loans issued to companies in the HVAC, early childhood development and consumer lending industries.
Yet strong demand implies a need to be selective when choosing whom to partner with. Our experienced credit team (over $4 billion in deal originations between them) partners with sophisticated lenders who have thoroughly researched and vetted their borrowers. Heron Finance adds a second layer of diligence–we stress test every business we invest in by combing through the business’ finances, competitive landscape and market position.
And we maintain strict investment standards. Most of our deals are senior secured debt backed by assets valued at over 100% of the loan amount. The borrowers must incur the first losses on any deal before we incur any losses, and our lending partners have loss ratios ranging from 0% - 1.3%. Read more about how we select deals.
Maintaining such a high degree of selectivity is critical, because even though now might be considered ‘the best of times’ for private credit investors, one never knows when the other shoe is going to drop. Many are predicting a recession (though predictions of a ‘soft’ or ‘moderate’ recession tend to outweigh those of a ‘severe’ recession). If a recession were to take hold, we want to ensure that a) our borrowers are well positioned to withstand downward economic pressure, and b) that if they do default, we can assume control of their assets and recoup our invested capital.
Of course, we may end up avoiding a recession altogether (thank you private credit!), in which case, it will likely be off to the races for the sector as a whole.
Heron Finance remains committed to ensuring the best possible outcome for our investors in either scenario.
Is Private Credit the Reason We're Not in a Recession?
An interesting take on how private credit may be supporting U.S. businesses and in turn, preventing the onset of a recession.
