Non-Bank Lending Surges 16% in Early 2024 Despite Economic Risks

Private Credit Hitters Rake in $48 Billion

The staggering $48 billion raised by Blackstone, Ares, and KKR for their private credit strategies last quarter defies concerns over rising economic risks and distress signals in the direct lending market. This capital influx underscores the growing appeal of private credit among yield-starved investors like pensions and insurers, even as the Fed's aggressive monetary tightening threatens to slow returns and increase stress for over-leveraged borrowers.

Sustained AUM Growth Amid Fundraising Cooldown

While the broader private equity fundraising landscape has cooled, these three titans have seen sustained growth in their credit assets under management (AUM), totaling nearly $900 billion combined.

Take a look at the Raised vs Target height delta below – it is large and comparatively larger than the same period in 2023 and 2022. This suggests a tough capital environment.

Rising Non-Accruals Signal Potential Losses

However, there are mounting signs of stress in the direct lending market. Non-accrual loan rates, an early indicator of potential losses, have surged at major business development companies (BDCs) like FS KKR Capital Corp, where the ratio hit 13% last quarter. While overall levels "look benign," analysts warn that underperforming credits need active management to mitigate losses.

Slowing but Still Active Deal Pipeline

Direct lending activity has slowed from last year’s breakneck pace, with Ares participating in just 3 large deals in 2024 versus 20 in 2023 and KKR in 4 after 10 last year. However, they remain among the most active lenders, alongside Blackstone, in a $200 million+ private credit loan monitor.

Stellar but Moderating Fund Returns

Top-performing private credit funds like Ares' have delivered stellar returns recently, with IRRs of 20-25%. However, as the Fed's rate hikes filter through to borrowers, returns are expected to moderate from these lofty levels, necessitating skillful management of underperforming assets.

Pensions Pile In Despite Risks

Pensions remain committed to the private credit space for now, with a California plan (CalPERS) committing $1.3 billion to Ares' senior direct lending fund in Q1, the largest of the quarter. However, a prolonged uptick in defaults, markdowns, or non-accruals could dampen enthusiasm for these historically high-returning but relatively illiquid strategies.

Looking ahead, Blackstone, Ares, and KKR's ability to continue attracting capital will hinge on their skill in navigating higher rates, slowing growth, and increased credit stress. While pensions are still piling in, prolonged distress could see the fundraising boom finally lose steam.

-written by James Tannahill, President of Plocamium Holdings LLC and contributor to Plocamium Global Insights.