The chairman of Partners Group has issued a warning that private credit default rates could potentially double in the coming years. Steffen Meister, whose firm manages $US185 billion across various asset classes, including private equity, debt, infrastructure and real estate, noted that annual defaults in private credit have averaged 2.6 per cent over the past decade. Partners Group is a global private markets investment manager, offering a range of investment solutions to institutional investors. The firm focuses on private equity, private real estate, private debt and private infrastructure.
Meister’s comments, coming from one of Europe’s largest private capital groups, arrive amidst a rush by investors to withdraw funds from US private credit funds. Funds managed by firms such as Blackstone, BlackRock, and Blue Owl have been impacted by concerns regarding credit quality and the anticipated influence of artificial intelligence on software companies, which constitute a significant portion of private credit borrowers. Meister suggested that the AI-driven “economic transformation” would disproportionately affect private credit compared to private equity, leading to a greater divergence in company performance.
Meister highlighted that the upside in credit is typically capped at the interest received, while lenders bear the full brunt of any downside risk. He pointed out that historically low default rates had allowed private credit lenders to manage diversified portfolios of loans, which were then leveraged again. However, he cautioned that this strategy may no longer be viable with increased defaults and reduced net spreads. He also predicted that spreads would increase in middle-market direct lending, where capital availability is limited, and emphasized the potential for strong credit returns through rigorous “private equity-style” underwriting.
Partners Group recently reported strong financial results, with 1.7 billion Swiss francs in management fees, other revenues, and operating income, along with 819 million Swiss francs in performance fees. These figures exceeded analyst expectations due to the earlier-than-anticipated completion of some exits of holdings.
