Private debt proves resilient despite elevated interest rates

Over the past few years, private debt has become one of the hottest asset classes in finance. Extended periods of historically low interest rates combined with regulatory reforms in the aftermath of the financial crisis, along with increasing allocations to private equity, have set the stage for private debt funds to shine. According to a Preqin investor survey in June 2024, ‘86% of investors said that private debt had met or exceeded expectations’.

Institutional investors dealing with the low yields from their fixed income portfolio began allocating more dollars to private debt funds. Not needing the liquidity offered by more traditional fixed income instruments, these investors were able to capture the illiquidity premium offered by these products without taking on more credit risk.

Private debt has grown from a niche product that helped the middle market and private equity-backed businesses access critical financing to a trillion-dollar asset class that helps businesses of all types and in all situations. This growth has invited scrutiny from policymakers all over the world. As a result, the American Investment Council (AIC) is increasing our education to policymakers to ensure that they fully understand that private debt is a safe, resilient option – and a critical source of capital for businesses of all sizes.

For example, the Bank of England has voiced concerns regarding the risk of private credit to financial stability, while the US National Association of Insurance Commissioners is also examining increasing allocations to private credit by insurance companies searching for additional yield.

The AIC is actively educating regulators on what private credit is and why it is an appropriate investment that presents no risk to financial stability. The past year of elevated interest rates combined with questions about the US economy’s health did not lead to a wave of defaults. In fact, over the past 18 months private debt has proven resilient. Though defaults have risen, they remain below the default rates of the broadly syndicated loan market.

According to Proskauer, private credit defaults in the second quarter of 2024 rose to 2.71%, while defaults in the broadly syndicated loan market were approximately 4.33%. This points not only to the strong underwriting capabilities of private debt managers, but also the flexibility that these lenders offer borrowers when issues arise. Fortunately, policy-makers have acknowledged that systemic risk associated with private debt is limited.

Speaking at an industry event in October, SEC Commissioner Hester M. Peirce recognized the unique characteristics and structure of the private debt market: ‘We should not build it up into a monster of our own imagination. If anything, the growing private credit sector may highlight the need for streamlining our public market regulation.’

In addition, the Federal Reserve began lowering interest rates in September, further easing concerns.

Private debt is an important asset class for all stakeholders. Investors see value in the increased yield, borrowers benefit from additional options, particularly small and medium-sized businesses, and communities benefit from well-capitalized firms that are a source of jobs.

The AIC will continue to educate policymakers on the value of private debt on Main Streets and across the American economy.

About
Drew Maloney is President and Chief Executive Officer (CEO) of the American Investment Council (AIC). The AIC is an advocacy and resource organization that represents the private equity and private credit industry and promotes the industry’s successful record of investing in every state across the US.

_{This article originally appeared in Preqin 2025 Global Report: Private Debt. The opinions and facts included in the above do not constitute investment advice. Professional advice should be sought before making any investment or other decisions. Preqin and the American Investment Council accept no liability for any decisions taken in relation to the above.}