Goldman Execs Discuss Private Credit's Rise Amid Market Uncertainty & Volatility

In Brief:

In a recent Goldman Sachs Exchanges interview, James Reynolds, Global Co-Head of Private Credit at Goldman Sachs Asset Management, and Lotfi Karoui, Chief Credit Strategist, discussed the explosive growth of private credit from under $100 billion in 2010 to approximately $2.1 trillion today. Despite current market volatility and recession fears, both experts argued that private credit remains resilient due to structural advantages like flexibility, certainty for borrowers, and insulation from market sentiment swings. Karoui notably pushed back against systemic risk concerns, suggesting that private credit actually serves as a "solid line of defense" against credit crunches during banking stress.

Big Picture Drivers:

• Market Growth: Private credit has expanded from under $100B in 2010 to $2.1T today, now comparable to high-yield bond markets

• Structural Advantages: Borrowers value certainty, flexibility, confidentiality, and speed of private credit transactions

• Insulation: Private markets remain relatively protected from short-term sentiment fluctuations

• Defensive Positioning: Private credit portfolios tend to focus on less cyclical sectors

Key Topics Covered:

• Asset Class Definition: Privately negotiated debt claims without third-party involvement

• Market Comparison: Now on par with high-yield bond market and broadly syndicated loan market

• Strategy Types: Senior direct lending, mezzanine, distressed, special situations, real estate, and infrastructure

• Investor Shift: Increasing allocation from public to private credit markets, including new access vehicles for mass affluent investors

Key Insights:

• Defensive Nature: Despite perceptions as higher risk, private credit often holds more defensive positions than public markets

• Manager Dispersion: Economic downturns will likely reveal significant performance gaps between managers

• Market Opportunity: Volatility creates opportunities in direct lending as borrowers seek funding certainty

• Systemic Risk: Concerns about private credit posing stability risks are likely overstated

By The Numbers:

• $2.1 trillion: Current approximate size of private credit assets under management

• $11 trillion: Size of private equity market for comparison

• 15 years: Period of dramatic growth for private credit as an asset class

• 2X: Typical leverage cap for Business Development Companies, though most don't exceed 1.5X

Memorable Quotes:

• "Private credit has acted as a very solid line of defense against the risk of a credit crunch in my view." - Lotfi Karoui

• "The performance of these platforms is solely linked to the absence of losers or defaults and subsequently losses." - James Reynolds

• "Today you can replicate a portfolio of public fixed income. You can replicate it almost entirely on the private side." - James Reynolds

• "By design, private credit and private markets actually more generally are insulated from these fluctuations in sentiment." - Lotfi Karoui

The Wrap: Despite looming recession fears, private credit appears well-positioned to weather market turbulence while continuing its growth trajectory. As traditional banking faces constraints, private credit's flexibility and structural advantages provide both defensive qualities and new opportunities. However, the relatively young asset class hasn't been fully tested through a complete economic cycle, suggesting investors should focus carefully on manager selection and sector exposure as economic conditions evolve.