Why Private Credit's Been Booming Even as Interest Rates Go Up

Tracy Alloway (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:15)

And I'm Joe Weisenthal.

Tracy Alloway (0:16)

Joe, what do you know about private credit?

Joe Weisenthal (0:20)

I know it's grown a lot.

Tracy Alloway (0:22)

That's pretty good. I mean, that's the important thing.

Joe Weisenthal (0:25)

It's private and there's credit involved. I think that's about, and I know it's grown, and I think that's about the extent of it.

Tracy Alloway (0:32)

Yeah, all right.

Joe Weisenthal (0:33)

No, I actually, wait, can I just add a little more?

Tracy Alloway (0:36)

Maybe.

Joe Weisenthal (0:37)

No, I get the, my sense is that that for whatever reason, and this I don't know, people perceive there to be opportunities in private, like, you know, there's private equity buying stakes, there's VC, et cetera, but people see an opportunity in pools of capital that are then lent out. Another, you know, lending that's not through banks.

Tracy Alloway (0:55)

That's it. That's the episode.

We're done. No, I mean, you hit upon the most striking thing at the moment, which is that this is a market that has grown remarkably over the years. And I've seen various estimates. I think people calculate what counts as private credit somewhat differently, but I've seen estimates of about 1.3 trillion to 1.6 trillion outstanding. And if you think about the publicly traded bond market or the publicly issued bond market, so if you look at junk rated corporate bonds, I think it's like 1.3 or 1.4 trillion outstanding, which means that the private credit market is now as big as the more broadly syndicated junk bond market, which is pretty stunning.

And you also hit upon something really interesting that's happening right now, which is that the conventional line of thinking was that as interest rates go up, this was going to be bad for private credit. You were going to see more financial stress, maybe funding for private credit was going to be more difficult to come by.

And instead, the market has boomed, and appetite for these deals remains pretty strong.

Joe Weisenthal (2:03)

Yeah, it's sort of a subset, I guess, of the surprising resilience of credit in general.

But absolutely, you would think, okay, here's this rapidly growing asset class that is booming in the ZERP era in 2020 and 2021 You think, okay, well, this comes to an end now, right? And other parts of private markets have gotten a lot of trouble. You know, I think about VC and how much slowdown there has been there. And yet, as far as I know, as far as we can tell, and everything that we've heard in sort of snippets from other conversations, that has not been the case in the private credit space. I gotta say, I'm surprised, when you were about to say how big the junk bond market was, I thought you were gonna say something much bigger than private credit still. So the fact that it's caught up is pretty striking.

Tracy Alloway (2:45)

Yeah, it really is. So we've been meaning to do this for a while, but I think we need to dive into this market. I expect we're gonna do more over time.

But to begin with, we need to figure out how these deals are structured, how they're different to broadly syndicated debt, so stuff like corporate bonds or leverage loans, what higher interest rates actually mean for this asset class, and maybe even what private credit's impact could be on the broader economy.

And I'm very pleased to say we do have the perfect guest. We're going to be speaking with Laura Holson. She is a managing director at New Mountain Capital. She is also COO of New Mountain's credit platform, which manages nearly $9 billion across private credit. So everything from private funds to publicly traded business development companies or BDCs, you might remember them from our interview with Dan Zwerin way back in the day. I think that was like seven or eight years ago.

Joe Weisenthal (3:41)

The real Odd Lots heads remember the Dan Zwerin interview.

Tracy Alloway (3:45)

Well, this was when we still referred to private credit as shadow banking, which I don't see as much anymore. It's sort of this more accepted part of the market. But okay, on that note, Laura, thank you so much for joining Odd Lots.

Laura Holson (3:58)

Thanks for having me.

Tracy Alloway (4:00)

So maybe I could begin with a very simple question, which Joe kind of alluded to in the intro, but what exactly counts as private credit nowadays?

Laura Holson (4:08)

Yeah, so the way I think about private credit is that it's debt that is privately originated, and Joe, as you said, meaning not intermediated by a bank, but that's also not traded on any kind of public market.