Market participants often ask why large corporate borrowers would choose a private solution for financing rather than the public markets, especially in the current environment. In this paper, we answer that question and explore the lasting power of private credit, the landscape of the debt markets, potential opportunities, and pitfalls to avoid.
Key Takeaways
- We continue to see increasing demand for large-scale direct lending, highlighting the enduring nature of private credit. We remain confident that lending to larger businesses on a first-lien, senior-secured basis at attractive yields continues to be an appealing opportunity today, bolstered by a desire on the part of corporations for multiple types of capital solutions as public and private markets increasingly converge.
- Despite the Federal Reserve’s shift to easing monetary policy, we expect interest rates to stay higher for longer on a relative basis (i.e., remain near historical levels as opposed to the near-zero rates seen in the 14 years after the Global Financial Crisis). An environment of sustained higher interest rates can enhance opportunities in direct lending, which can benefit from floating rates. Additionally, private/public credit yield spreads continue to offer an attractive premium, as we expect that to remain the case for the foreseeable future.
- We believe that the opportunity to provide private capital to borrowers may be enhanced as dealmaking activity (e.g., M&A) picks up further in light of potentially less-stringent regulatory policies from the incoming presidential administration.
- Even as public debt markets have seen a resurgence, we believe both the public and private debt markets can continue to grow and coexist. We do not see it as an either/or opportunity. Rather, we firmly believe that the key benefits private credit can offer—i.e., customized capital solutions, speed, and certainty of execution—have now become an integral part of the menu of credit solutions available to large borrowers.
- In our view, private credit is not inherently more risky compared with public debt markets. Private transactions are negotiated on a bilateral basis, which can allow lenders to secure stronger legal and contractual protections.
The information herein is provided for educational purposes only and should not be construed as financial or investment advice, nor should any information in this document be relied on when making an investment decision. Opinions and views expressed reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change. Please see the end of this document for important disclosure information.
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