Private credit is the fastest growing alternative investment asset class since the GFC. Today, private credit lenders have the upper hand relative to private equity, making this the best environment for lenders in 25 years. Interest rates are rising, leverage levels are declining, M&A activity has been slowing, and lenders are able to negotiate stronger covenants and documentation.
The middle market is defined as companies with EBITDA below $100 million. Lower middle market companies have less than $35 million in EBITDA, while companies in the upper middle market range from $35 million to $100 million in EBITDA. The US middle market generates the third largest GDP in the world, with 200,000 companies providing 48 million jobs. Private credit lenders have greater control and flexibility in their dealings with middle market companies compared to larger public companies in the syndicated loan market.
The real risk in private credit is defaults, which happen in recessions. Koenig sees a soft landing, with predictions that today’s 2 to 3% default rates will not rise to the 12% peak default rates experienced in the GFC. First-lien private credit direct lending is at the top of the capital structure, often 50% loan-to-value. When borrowers default, private credit lenders are relatively protected when their loans are senior as opposed to mezzanine, second lien, structured notes, and equity.