Direct lending should continue to produce high returns this year despite central bank rate cuts, according to AllianceBernstein’s head of private alternatives.
Matthew D. Bass noted that high interest rates cooled deal activity in direct lending last year, but with average yields above 12 per cent in 2023, the strategy also generated strong returns for investors.
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“When it comes to the cost of capital, ‘higher-for-longer’ has been the dominant theme in markets for at least a year now,” he said. “And it’s likely to remain so – even if central banks deliver a handful of expected interest-rate cuts in the months ahead.”
The US Federal Reserve is widely anticipated to cut rates later this year and Bass expects the base rate to finish 2024 at around 4.5 per cent.
He highlighted that this is well above the sub-one per cent levels that prevailed after the global financial crisis.
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“That will keep new-issue yields in private credit above historical levels, which should add up to high return potential for investors,” he added.
However, Bass acknowledged that some borrowers will struggle with high rates.
“That will put a premium on a manager’s ability to build resilient portfolios rooted in strong upfront underwriting, appropriate structuring and active portfolio management across existing positions,” he said. “But relative stability in rates and narrowing bid-ask spreads should help increase overall deal volume.”
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