Private credit
LP capital looks set to flow to established private credit managers, although some are concerned about risks in the asset class.
After several years of rapid expansion, private credit may be facing a period of consolidation. Capital was already starting to concentrate among existing players, and our results point to this trend accelerating in coming years.
Despite 87% of LPs planning to either maintain or increase their private credit target allocations, recently established GPs in the asset class face challenging fundraising conditions ahead: the majority of respondents perceive them as less attractive across all regions in the next two years. This contrasts with our findings in 2022, when more than half of LPs ranked new private credit managers as more attractive in both North America and Europe in the coming two years.
This shift may be down to LPs focusing on existing relationships with established GPs as their private credit portfolios have matured in the intervening years. However, at least some reticence to fund new managers likely stems from a wider disquiet about potential losses and risk in private credit portfolios reported in the media in the past few months.
Indeed, our survey shows that some investors are clearly concerned about risks in private credit with 18% believing there is a systemic problem in the asset class. However, with nearly a third (29%) comfortable that the risk in the asset class is in line with expectations and just over half (53%) believing there is isolated risk above and beyond initial expectations, LPs appear to have a more nuanced take on private credit than is evident in some media reporting.
To gain more context, we asked respondents how well they understood expected loss ratios in their own private credit portfolios. Nearly half (49%) rate their understanding as good or very good, yet 45% characterising it as reasonable with a further 5% as poor. This suggests that there may be some gaps in investor knowledge of private credit risk profiles, and that there could be room for improvement in LP education and reporting.
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Ask LPs whether the issues in private credit right now are systemic, and the answer is more measured than the headlines suggest.
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The latest Coller Capital Barometer asks LPs directly how they feel about the current nervousness around private credit.
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Less than 20% believe there’s a systemic problem in the asset class. 53% say there’s isolated risk above initial expectations. And 29% are comfortable.
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That risk is in line with what they signed up for. That is a more nuanced read than the news cycle would suggest.
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The majority of LPs aren’t calling time on private credit. They’re saying the risk profile has drifted from their original expectations – but they are not seeing contagion.
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There’s another finding worth flagging.
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46% of LPs describe their understanding of expected loss ratios in their own credit portfolios as only reasonable.
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That suggests room for better reporting and more LP education from GPs.
