Private credit funds delivered an average return of 3.2 percent in the first quarter, a notable drop from 8.5 percent in the prior quarter and well below the double-digit returns seen throughout 2023. This shift marks the end of a multi-year period of robust performance for the asset class. The cooling trend signals a tougher environment for publicly traded alternative asset managers like Blackstone Inc. and Apollo Global Management Inc.
Rising interest rates have increased borrowing costs for private companies, making new deals less attractive and raising refinancing risks for existing portfolios. A competitive lending landscape, with more players entering the market, has also compressed deal margins. Analysts now anticipate an uptick in default rates across certain private credit portfolios, further impacting fee income and carried interest generated by firms managing these funds.
Goldman Sachs analysts recently downgraded their outlook for the alternative asset management sector, citing both valuation concerns and a less favorable credit environment. They lowered their price target for Ares Management Corp. (ARES) to $120 from $135, reflecting a more cautious stance on future earnings. The firm projects private credit assets under management growth could slow to high single-digits over the next year, down from the 15 to 20 percent expansion seen in previous periods.
Institutional investors, including large pension funds and endowments, have poured billions into private credit funds seeking higher yields than traditional fixed income. This capital flow may now slow as returns diminish, potentially impacting future fundraising efforts for alternative managers. The shift in investor sentiment could also prompt a reallocation of capital toward other asset classes.
Management teams at major alternative asset firms are highlighting their diversified business models, including strong segments in real estate and private equity. However, private credit has been a significant driver of recent revenue growth, attracting substantial institutional capital. A sustained slowdown in private credit could lead to a re-evaluation of these firms' equity valuations, which have benefited from consistent fee streams.
Blackstone Inc. (BX) is scheduled to report its second-quarter earnings on July 18. Apollo Global Management Inc. (APO) follows on July 25. These reports will provide the first detailed financial disclosures reflecting the impact of the softening private credit market.
