12 August 2022 |
GSAM Featured Insights
Menu
Our services in the selected location:
- No services available for your region.
Your browser is out of date.
We have been made aware that there are external parties falsely claiming to carry out financial services on behalf of Goldman Sachs (including Goldman Sachs Asset Management International and Goldman Sachs International) in order to market fake investment products and to solicit monetary payments. These external parties may pose as Goldman Sachs through the use of fraudulent communications via email, instant messaging or phone, as well as through the use of fake brochures and other documents containing Goldman Sachs branding and logos.
The Financial Conduct Authority of UK has issued warnings about these fraudulent activities which can be found here and here.
It is important to know that any communication you receive from Goldman Sachs would only come from an @gs.com e-mail address and/or be found on the goldmansachs.com website. Further information regarding how you can protect yourself from fraudulent activity online and how you can contact us about this can be found on the Goldman Sachs Security page, available here.
-
In the Spotlight
Invest in the Future
Sweeping technological, environmental and demographic megatrends are changing how we live and work. We think they should change how we invest, too. Our thematic equity strategies seek to invest in the future.Read More -
-
- By Asset Class
-
Fixed Income
-
Equities
-
Money Markets
-
Multi-Asset
In the Spotlight
Perspectives
In our spring edition of Perspectives, we explore why we believe an active, dynamic, and nimble approach across public and private markets can help investors build resilience into their portfolios and find footholds for growth in rapidly changing economic and market conditions.Read More -
-
- Product Collateral
-
Product Brochures
-
Monthly Fund Update
-
Prospectus
-
KIDs
-
- Advisor Resources
-
Strategic Advisory Solutions
-
Business Practice
-
- Documents & Forms
-
Literature Centre
-
Forms, Notices and Tax Centre
In The Spotlight
Our In-Depth Commentary Could Help You Gain a Competitive Edge
Read MoreStay on top of the latest market insights, key investment themes, and developments in the global economy affecting your portfolio and investment practices.
-
-
-
- About Us
-
Overview
-
News and Media
-
Stewardship
-
Contact Us
-
- Company Sites
-
GoldmanSachs.com
-
GIR
-
-
Explore how we can help you
Talk to UsUnderstanding Private Credit
October 20, 2022 | 5 Minute Read
A company in need of debt financing—whether for ongoing operations, business expansion or corporate acquisitions—can turn to various sources of financing. One common source is a loan from a bank, which would then either hold the loan on its balance sheet or syndicate it to a group of similar investors. A large company can also issue bonds that subsequently trade in the public markets. Or the company can turn to private credit, working with a single lender to craft a tailored capital solution.
For a borrower, the advantages of private credit include certainty and speed of execution—a feature especially attractive in volatile public market conditions—as well as confidentiality in avoidance of broad dissemination of proprietary information.
WHAT IS PRIVATE CREDIT?
Private credit covers an array of strategies that span the capital structure and borrower type. These range from senior secured loans for blue-chip corporate borrowers, to junior unsecured credit for financing new building construction, to loans against specialized assets such as railcars and airplanes or contractual revenue streams like royalties and subscription services, to distressed situations.
Different loans carry different types and levels of risk—and can generate a range of returns commensurate to that risk. Returns also vary across yield and capital appreciation components. Senior, secured loans offer relatively stable yield and are lower on the risk and return spectrum than other private credit strategies. Unsecured subordinated and mezzanine strategies provide financing further down the capital structure, with higher yield to compensate for the additional credit risk. They may also incorporate additional securities to participate in potential equity upside. Specialty and alternative credit opportunities also typically provide cash yield and vary across the risk/return spectrum. Distressed and opportunistic strategies target firms undergoing meaningful challenges. They typically have the highest dispersion of outcomes and lack a yield component, but also have the potential for higher upside as the companies are restructured.
The variety of private credit strategies and their features means that a private credit portfolio can be structured to target a wide range of objectives and can be tailored to an investor’s individualized goals.
WHY INVEST IN PRIVATE CREDIT?
Private credit can be a powerful complement to traditional fixed income strategies, offering incremental income generation, potential resilience, return enhancement, and diversification.
Income generation. Over the past decade, the asset class has generated higher yield than most other asset classes, including 3-6% over public high yield and broadly syndicated loans. Borrowers have been willing to pay a premium for the certainty of execution, agility and customization that private lenders offer.
The Universe of Private Credit Strategies Has Been Expanding, Diversifying
Resilience. Private credit has historically maintained loss ratios that are lower than those of high-yield fixed income instruments. Deep access to company records received by private lenders enables stronger due diligence and documentation than may be the case in public markets. The ability to select investments without the need to manage to a benchmark can be a potential downside mitigant in an environment of increased dispersion, slowing growth, tightening monetary policy and headwinds to profitability. Furthermore, private credit typically features a single entity lending to a borrower. This can make for quicker and more efficient workouts—and potentially greater recovery—in case of default, compared to publicly syndicated debt placements that feature multiple lenders with competing priorities.
Potential return enhancement. Aided by the yield premium and resilience dynamics, private credit has outperformed public loans over the past decade, having delivered 10% annualized returns compared to an annualized 5% for public loans.1 In a rising-interest rate environment, private credit may find its floating rate nature a further advantage. Private credit instruments are typically tied to floating rates (such as SOFR). When interest rates rise, those increases are automatically reflected in the private credit coupon. This dynamic makes floating-rate debt less sensitive to interest rates compared to fixed-rate bonds, which typically lose value as interest rates rise.
Diversification. Some private credit strategies are most directly exposed to the economic health of corporate borrowers, others to the consumer, others to real assets. Some strategies, such as performing corporate and real asset credit, tend to move with the economic cycle. Others, such as distressed and opportunistic, may be more counter-cyclical, finding more attractive opportunities when the economy is challenged. Some specialty credit strategies are less sensitive to the cycles of the broader economy.
Comparison of Overall Performance1
Evolution of the Asset Class
The private debt market has grown more than six-fold since the Global Financial Crisis of 2007-2008, with senior lending strategies having experienced the most robust growth. Today, the private credit market stands at $1.2 trillion.2 Part of this growth has been driven by increasing barriers to entry in certain market segments. For instance smaller companies have found it more challenging to access public markets as the average bond and syndicated loan deal sizes have grown.
Much of the growth in demand for private credit solutions, however, has been driven by the unique value proposition that private lenders can offer borrowers. Private lenders are becoming preferred financing partners due to their sophistication, flexibility, certainty of execution, and the critical support they can offer to borrowers in challenging environments, as evidenced most recently through the COVID-19 pandemic. Some strategies also focus on assets or structures too complex for typical traditional lenders to underwrite, relying on complex approaches to properly evaluate and manage risks.
The growth of the asset class, buoyed by investor interest, has also helped it expand its scope. While historically private lenders focused on middle-market companies, the recent growth in fund sizes has made it possible to also finance larger deals while maintaining prudent fund diversification parameters. It has also enabled innovative approaches to better meet borrower needs— such as the emergence of unitranche transactions, in which a lender issues a single credit instrument, rather than a more complex capital structure that would subdivide the borrowed amount into junior vs. senior tranches of debt.
Finding the Right Partner
With a variety of strategies, the dispersion of results can be wide. Even within a strategy, the range of outcomes can vary based on the skill and experience of the manager. This makes finding the right partner critical. Critical items to consider include the types of borrowers and assets each manager is lending against, their position in the capital structure, the terms and protections they negotiate, their experience and track record in investing through multiple cycles, and their expertise in managing through stressed and distressed situations.
Save a copy as a PDF
Understanding Private Credit
Related Insights
-
-
01 August 2022 | GSAM Featured Insights
Introduction to Private Equity
01 August 2022 As an asset class, private equity has gained increasing attention among both companies looking to access capital and investors looking to diversify beyond traditional public markets. . Given the complexity and higher thresholds governing investors’ access to private equity, illiquidity and higher investment minimums, it’s important to understand the nuances of investing in this growing asset class. Read More
Start the Conversation
Committed to providing you with the insights you need to build your practice.
