Private credit defaults are rising and more borrowers are being placed on watchlists, according to a report by the Wall Street Journal cited in Private Equity Wire. An analysis of recent quarterly disclosures from publicly listed vehicles managed by Ares Management, Blackstone, Blue Owl Capital and Golub Capital found non-accruing loans reached their highest levels in at least five years.
Non-Performing Loan Levels
The proportion of non-performing loans at Blue Owl Capital Corp reached 2.8% in the second quarter. Comparable measures at Ares Capital Corp, Golub Capital BDC and Blackstone Secured Lending Fund also reached five-year highs. Those levels remain below the extremes seen during the Covid-19 pandemic and the 2015 oil-price collapse. Healthcare businesses and companies exposed to higher energy costs have accounted for much of the emerging stress.
Watchlist Trends
Funds managed by Ares, Golub and KKR reported increases this year in the number of borrowers placed on watchlists for weakening credit quality. The levels are now the highest for those funds since the 2022-23 period. Blue Owl has reported a different trend, with co-CEO Marc Lipschultz stating the firm’s software exposure remained profitable and there had been no meaningful change in its watchlist compared with the previous year.
Returns and Performance Factors
A KKR-managed fund recorded a 6.55% loss over the 12 months through June, an improvement from a 9.17% decline in the previous period. Slower private equity dealmaking has reduced the supply of new loans carrying attractive yields. Weaker operating performance among borrowers has prompted lenders to mark down investments. Declines in public debt markets have also affected valuations while falling benchmark rates are reducing interest income. According to Private Equity Wire, private credit managers previously benefited from elevated benchmark interest rates and routinely generated annual returns of 10% or more.
Software Exposure Concerns
Software accounts for at least 20% of the loans at a number of private-credit funds. Investors are focused on private credit’s exposure to software companies that face potential disruption from artificial intelligence. The combination of weaker returns and higher defaults could become particularly important for managers targeting individual investors accustomed to relatively consistent double-digit returns, according to Private Equity Wire.
