The total value of companies in the private credit market has increased over the last year but the quality of much of the debt they have issued has declined, according to an analysis by Lincoln International, an investment bank advisory service that monitors that market.
The new data sheds some light on a $3 trillion market that has recently been unnerved by Blue Owl Capital’s decision to ban retail investors from cashing out of one of its private debt funds, in favor of returning their money through episodic payments as it liquidates assets. Shares in Blue Owl fell 6% on that news.
Lincoln looked at 7,000 company valuations, using data from over 225 asset managers globally, within its Private Market Index. It found:
- The enterprise value of the companies in the $250 billion index increased by 1.9%.
- Growth in earnings before interest, taxes, depreciation and amortization (Ebitda) among companies that have issued private debt is in decline, largely because the number of high-growth companies is in decline, lowering the average level of profitability across the index.
- The “shadow default” rate — meaning the percentage of companies that took on unexpected extra lending conditions midway through the terms of their deals — increased from 2.5% of all deals to 6.4% over the last year.
- Company leverage (the amount borrowed against the Ebitda of the company) should have declined over time as borrowers work off their loans but in fact it has gone up recently, eating into returns for lenders.
- A decline in interest rates offered by the Fed plus excessive demand for private credit investments has reduced yields for investors.
