Insight  |  January 4, 2023

Muzinich & Co. 2023 Private Debt Outlook – New Landscape, New Opportunities

Despite the changing macroeconomic backdrop we believe new opportunities are emerging for private lenders globally.

Main Takeaways

• Increased Return Potential - Higher rates have increased the return potential for private debt
• Ongoing Opportunities from Banks - Private lenders are continuing to benefit from bank retrenchment
• Investments in Defensive and Economically Resilient Sectors - Recessionary risks are resulting in different opportunities and considerations in deal selectivity

Global credit markets have experienced a turbulent 2022. Russia’s invasion of Ukraine and a rapid rise in inflation and interest rates have altered the landscape for fixed income investors. Despite these challenges we believe private debt has held up well; perhaps the most obvious benefit being the higher return potential given the underlying loans are priced over base rates, which have risen in conjunction with interest rates.

Looking ahead, we believe private debt globally continues to offer investors opportunities, with different regions providing their own idiosyncrasies, of which dedicated providers can take advantage.

Lower Middle Market Appears Insulated

While there is a concern that higher rates may impact a borrower’s debt servicing capabilities, companies in the lower middle market (where our investments are focused) generally have lower leverage in comparison to their larger counterparts.

While we expect not all corporate budgets will be fulfilled, that does not necessarily translate into covenant pressure and liquidity issues. Relatively strong companies in this segment are generally more insulated from recessionary risk and could benefit nicely once there are signs of economic recovery.

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