Systemic concerns over the rise of private credit are largely overblown, according to Goldman Sachs’ chief credit strategist Lotfi Karoui.
Rising interest rates have been a boon for private credit investors, particularly because most private credit borrowing is done in floating rate form. However, some investors are questioning the ability of borrowers to weather higher interest payments. Some even wonder whether a substantial rise in defaults could pose a risk to financial stability.
Karoui believes private credit will actually be more robust than public credit in transitioning to a higher cost of capital environment. “On the private side, oftentimes it's one lender, one borrower,” he says, which allows for faster and less costly resolution of financial distress. Lenders in private markets also have more control over covenants and amortization payments, which typically leads to better recovery values.
“Private debt markets,” concludes Karoui, “will continue to grow as a scalable and distinct asset class for capital allocators.”