Since 2008 the private credit space has grown exponentially as an asset class that attracted institutional investors. With the fast majority of the activity comprised of loans to private equity backed companies. These transactions were either additional investments provided by the original GP or a partnership between the GP and a private credit investment shop. By the middle of 2002 the asset reached an estimated $1.25 trillion in outstanding credit obligations.
Now, as we look at a confusing macro environment for 2023 with the Fed continuing to hike rates into an economy that is sending mixed signals as to its strength, private credit providers are eying each potential transaction with a more cautious eye. Part of the reason is the uncertainty surrounding the macro-economic conditions and what effect the current credit cycle will have on product and service demand for companies taking on private credit as a financing option. But more so, in our opinion, it is simple supply and demand. The capital competing for credit deals is the smallest it has been in years, putting lenders in a very favorable position to negotiate terms they were unable to achieve in the past. As of mid last year, $145B in dry powder was available in the private credit space, as opposed to $525B in private equity. An outstanding delta. Further, much of the new activity is being generated in the hard assets sub sector of the space as investors shift their allocations away from unsecured obligations. That will be at tend we expect to increase until we have some level of certainty around global macro economic conditions.