Private credit is already seeing outperformance: the State Street PE Index had private credit funds beating private equity funds, their merger and acquisition-focused rivals, by more than five times in the third quarter of 2023, the last quarter for which there is data.

The current market sets a promising stage for private credit investors.

I expect banks to actively decrease their commercial real estate exposure, resulting in a scarcity of debt capital, which is unlikely to change meaningfully for the next few years. Considering the current state of bank lending in the commercial real estate market, it is unlikely that the usual suspects — insurance companies, government agencies or CMBS — will be able to fill the gap, which opens the door further for private credit.

Citigroup found that regional or smaller lenders hold roughly 70 percent of commercial real estate loans. With almost $1 trillion of these loans maturing this year, a function of mass extensions from 2023 maturities, it is unlikely that these smaller financial institutions will have the ability or interest to extend these loans, keeping the door open longer for private credit lenders.

We are already seeing this play out with banks, as they have had the most significant pullback in originations, down 50 percent annually in dollar volume in the fourth quarter of 2023.

From an investor downside protection standpoint, today’s commercial real estate loans are generally characterized by lower loan-to-value ratios (LTVs), better coverage ratios, and more favorable covenants and structures despite higher rates.

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