Private credit markdowns vs. actual realized losses during periods of market stress
Source: Cliffwater, as of Q4 2023.
- The massive growth in the private credit market has raised concerns around private credit valuations and the potential for prices to crash in the event of a market downturn, driving wider systemic challenges.
- Private credit investors are inherently buy-and-hold investors given the illiquidity of the underlying assets and the role of private lenders in providing long-term capital to creditworthy companies. Therefore, valuations reflect an estimate for ultimate losses as opposed to the cost of liquidity or other variables more appropriate for liquid securities.
- As the chart shows, private credit valuations have historically overestimated the level of investor losses actually experienced in each major market stress event since the Global Financial Crisis.
- Private credit assets were marked down by nearly 20% from mid-2007 through Q1 2009, during the Global Financial Crisis.1 Over the subsequent two years, realized losses on the same loans were roughly half of that.1 The same statement can be made for the 2015–2016 energy-driven drawdown and the COVID period.1
- Private credit remains a non-standardized asset class, and valuation procedures should be a large factor when evaluating managers. On the whole, however, valuations are meant to reflect expected realized losses and to that end, there are no signs of systemic overvaluation.
