BlackRock Alternatives

Private Credit In Focus

April 2023 | By BlackRock

Macro Themes


Active Portfolio Management

We continue to monitor our portfolio companies’ ability to navigate the higher cost-of-capital environment amidst an expectation for slowing economic growth. Continuous engagement allows us to provide our expertise and capital early on, should a company encounter challenges.


Banking in the Private Credit Market

We expect the widely anticipated contraction in bank lending will provide two tailwinds for private credit: 1) an expansion of the addressable market of potential borrowers, including in the upper middle-market, and 2) enhanced pricing power vs. the public market, reflective of the certainty of execution that private credit provides.


Deconstructing a Private Credit Default

While defaults are likely to increase across the broader credit market, the nuances between private and public defaults are important. In private credit, the first sign of a default is typically a covenant default, as opposed to a payment default (which is more typical in the “covenant-lite” public markets).

This is an excerpt from the full monthly report which goes deeper into how private credit is navigating key macro or market themes, current insights from our 4 Private Credit platforms, and the landscape of the global private credit asset class.

Through the cycle

Recession fears are continuing to grow as a number of economic indicators have started to imply a softening in the outlook. This leads to a natural question - how do we achieve comfort in locking capital up for 5 to 8 years (the typical maturity range of private credit), especially heading into a potential downturn? Our answer is that we underwrite “through the cycle”. By this we mean that we seek to account for fluctuations in macroeconomic and market conditions. By doing so, our underwriting process avoids reliance on past or current growth rates. Our projected investment returns are scrutinized to an upside case, a base case and a downside case.

Last year, we sourced over 2,000 investment opportunities and ultimately funded 125. We highlight these numbers to demonstrate that the breadth and depth of our sourcing channels is robust, but the number of investments implies by

sheer probability that we are likely to witness at least some challenged investments. According to one valuation provider, the default rate in their private credit index doubled from 1.12% in 1Q2022 to 2.15% in 1Q2023.1 Hence, the importance of covenants. We wrote last month how we routinely build in covenants that allow us to remedy business challenges early on.

Even with the best underwriting processes, a private credit lender is likely to exhibit a material default in at least a handful of portfolio companies that will require a more thorough solution. To that end, any private credit lender should have a playbook for how they would invest in or solve for a distressed or a restructuring event. With over twenty years of experience investing in private credit, we’ve restructured portfolio companies and/or renegotiated deal terms over multiple credit cycles. Our spotlight this month provides insight into how we approach distressed and restructuring events.

James Keenan
Managing Director, Chief Investment Officer and Global Co-Head of Credit
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Terry A. Simpson
Senior Multi-Private Credit PM
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Resilience and adaptation

As investors seek to navigate an unprecedented market regime, we see private market investments as well-suited to the task. Read more in the 2022 Private Markets Outlook.
Resilience and adaptation