Outlook Private Credit
Disclaimer: The information and materials prepared are for internal use only and on how the Dancap Family Investment Office (“Dancap”) views current market dynamics. Dancap does not guarantee the accuracy or completeness of the material and it is not intended in any manner to be investment, financial, legal, accounting, tax or other advice and should not be relied upon.
Dancap's Current Private Debt Strategy
February 2025
Dancap has over 25 years of experience investing in private debt through third-party fund managers and co-investments. This market overview provides an update on Dancap’s private debt holdings, focusing on their alignment with our current investment strategy, geographic allocation, and an analysis of prevailing market dynamics, outlook, and potential risks. The majority of Dancap’s private debt portfolio is allocated to third-party managed funds that emphasize U.S. senior secured, floating-rate, sponsor-backed corporate lending strategies. These strategies, with modest leverage, aim to deliver strong risk-adjusted returns, downside protection, and stable income, particularly in a rising interest rate environment. Our private debt managers have long-standing track records across multiple market cycles and work with sponsors who bring proven expertise in their fields. Our senior secured lending strategies target minimum net returns of 10% IRR, while second-lien and mezzanine strategies are designed to achieve minimum net returns of 15% IRR. This approach reflects a focus on maintaining a balanced portfolio with attractive returns and risk mitigation.
US Private Debt Strategy
Private debt tends to be a growth-sensitive asset class, and the stronger-than-expected pace of U.S. economic growth in 2023 and 2024 has contributed to higher returns in private debt over the past two years. Elevated base rates, driven by the Federal Funds Rate, combined with stable default rates, have further supported this performance. According to data from Lincoln International, the trailing 12-month returns for direct lending as of Q3 2024 exceeded 12%, well above historical average returns of 8% between from 2015 to 2024. Strong performance in private debt has led to continued robust fundraising in the asset class – private debt funds raised $170 billion in new commitments in 2024, matching their fundraising pace from 2023, according to Pitchbook data, with direct lending accounted for $120 billion, or over 70% of the total commitments.
Source: Morgan Stanley US Credit Strategy: The Road Ahead – Private Credit in 2025
Larger companies in the private debt market have consistently demonstrated lower default rates, benefiting from greater financial flexibility, operational efficiency, and access to diversified revenue streams. This has been evident in the size-weighted covenant default rate, which remained at just 2.6% through June 2024, significantly lower than the instance-weighted rate of 7.5% faced by smaller borrowers, according to Blackrock. Within the private debt space, Dancap continues to prioritize investing in managers focused on US sponsor-backed senior secured lending to larger companies.
Source: Blackrock 2025 Private Markets Outlook
US Private Debt Outlook
In 2025, investors will likely need to closely monitor the economic growth and inflation backdrop in the United States, as well as the Federal Reserve’s policy responses throughout the year. If economic growth remains robust and inflation continues to moderate, private credit investors should benefit from sustained elevated base rates and stable default rates. Additionally, a rebound in sponsor-related M&A activity is anticipated, which may create more opportunities for managers to deploy capital at attractive yields. This dynamic could further enhance the appeal of private credit as an asset class in 2025. According to Morgan Stanley, private debt returns have averaged approximately 8% annually over the past decade (2015–2024). However, given the current strong economic environment and elevated base rates compared to the previous ten years, investors can anticipate returns closer to 10% in 2025.
Source: Morgan Stanley US Credit Strategy: The Road Ahead – Private Credit in 2025
That said, private debt managers are likely to face increasing competition from the broadly syndicated loan (BSL) market in 2025. BSL arrangers and investors have shown renewed appetite for M&A and leveraged buyout financings after stepping back during the period of interest rate dislocation. As economic conditions stabilize, this resurgence in BSL activity could impact deal flow and pricing within the private debt space, reinforcing the need for managers to differentiate through granular credit selection and value-added structuring
To see the Dancap Private Credit Investment Criteria and Portfolio, please click here.