BlackRock Alternatives

Private Credit In Focus

May 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.

Waiting on the lag

After one of the most aggressive monetary tightening campaigns in the history of central banking, market participants are waiting on the full effects to permeate through global economies culminating in a recession. Policy makers have highlighted that a slowing of policy hikes may be warranted due to stresses of regional banking cases and tightening lending standards. Additionally, the levels of notable recession indicators such as the Conference Board’s Leading Index and the inversion of global sovereign yields curves provide credibility to the prospect of a near term recession. Whether or not a recession materializes, our base case for 2023 is for a period of below trend growth.

A main focus for policy makers is inflation, specifically, ‘supercore’ inflation, which excludes the impact of energy and housing prices. Yet, even noting the improvement we’ve seen in inflation, this key inflation metric is still double the pre-pandemic level. For example, the U.S. ‘supercore’ inflation is down from 6.5% in September 2022 to 5.1% at last print, but still above the pre-pandemic average of ~2%.1 Additionally, with positive financial markets performance year to date, this has offset some of the effect of monetary tightening. Case in point, U.S. financial conditions are at the same level as when the Federal Reserve began their current rate hiking cycle. A similar story can be seen in the United Kingdom. 2

As we attempt to balance the narratives from multiple economic and market indicators, we maintain our call that central banks will not cut interest rates in the second half of 2023 despite the market pricing in cuts. Nonetheless, as allocators, this creates a complex investing environment as we invest into a downturn. On the public and private credit side, this still argues for focusing on quality. Note, that quality is nuanced and does not always align with the typical rating classifications. In private credit, we continue to be active with our portfolio companies to monitor the revenue and earnings outlook and/or to understand their liquidity needs.

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