The private credit sector will face painful “bumps in the road” as interest-rate hikes start to bite, causing headwinds for one of the fastest-growing sectors of finance, according to Cécile Mayer-Levi, head of private debt at alternative asset manager Tikehau Capital SCA.

The market, in which companies raise loans direct from investors rather than through the banking system, is facing hurdles now because it’s no longer operating in “the kind of rosy environment” created by the low interest rates of the past decade, she told a panel at Private Equity International’s “Women in Private Markets Summit” in London this week.

The $1.6 trillion private credit industry has attracted significant capital and attention from hosts of fans and new entrants, and has now become mainstream, Mayer-Levi said on the sidelines of the conference. However, concern for private-credit portfolios in a higher-for-longer interest-rate environment is mounting and a slump in mergers and acquisitions could spark a race to the bottom. The sheer growth of the sector could create problems as well.

“Everyone has at least one or two kind of concerning situations in their portfolio,” Mayer-Levi said. “When you have more than 100 companies, statistically it doesn’t fly that you have no problems.”

Firms are becoming stretched and can’t afford the same levels of leverage now because of higher interest rates, she said, estimating that companies in the direct lending market have an average loan ratio of four to five times Ebitda. “Globally, the risk return will be significantly improved” if that were to come down, she said.

“Some companies are actually not able to fully pay down their debt when cashflow generation is impacted, and the issue is more than ever the propensity to anticipate refinancing,” Mayer-Levi said.

Deal Slump

Meanwhile, the slump in deal volume is causing tighter pricing and greater competition among funds. “There are fewer transactions globally,” she said, but at the same time “many funds are going after the same situations.”

Nevertheless, Mayer-Levi notes that the use of covenants in private credit is a positive, as is the size of the deals, which tend to be smaller than in more mainstream markets. Typically fewer lenders are involved as well. “We can react and adjust the cost structure extremely fast,” she said.

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