With the S&P 500 on pace for its worst monthly performance since December of last year, investors are increasingly turning to alternative assets outside of equities and bonds to generate returns.
One of those strategies is private credit. Despite the changing macro backdrop, the industry has posted annual gains for the last 13 years and is expected to continue drawing strong interest from institutional investors. According to a new report by Pitchbook, investors are likely to put more than $200 billion in commitments into private credit this year, for the fourth year in a row.
As the strategy gains steam, some are concerned that higher-for-longer interest rates could put more stress on the balance sheets of borrowers. Though, Michael Arougheti, who helms one of the largest private credit firms in the world, said he’s not too concerned about a major default cycle.
“I would expect default rates to tick up but not to dangerously high levels,” Arougheti said in an interview with CNBC’s Leslie Picker. “The irony of this moment in time, which is unlike many cycles we’ve seen before, the stresses are being created by liquidity and high rates not deteriorating cash flow.”
However, as servicing the debt becomes more expensive, that could force more negotiations between private credit managers and their borrowers.
“If rates stay high for long…through the end of 2024, that debt service will force companies back to the table,” Arougheti added.
Arougheti said the firm has been benefitting from rising rates, boosting their relative return. He noted that in pulling data points from the 3,000 portfolio companies Ares lends to and invests in, he’s seen “fundamental strength despite the rise in rates.”