Private credit funds are chasing too much capital into too few deals, forcing rates down from 12-15% to 8-10%. To hit return targets, they're using more leverage and financial engineering. A 9% loan today can be riskier than a 12% loan was a few years ago.
this industry has grown. It's grown a lot, right? The demand for this type of capital has grown from the borrowers, but the amount of capital that is wanting to invest in these types of deals and funds has grown at a much faster rate. And so there's just a much larger amount of capital looking into a fixed pool of assets. And so what's happened is a few things. One, to your point, you have to go find somewhere to lend it, to invest it, and you're generally going to start going to tier 2 and tier 3 borrowers that maybe you wouldn't have before. And then the second consequence is, well, if I do want to have higher quality, my portfolio, I have to get very competitive on my yield. So all of a sudden, when you were being able to charge, say, 12, 13, 14, 15% interest rates, now you're having to charge 10%, 9%, 8%. All of a sudden, you're not that much more expensive than a bank, but you're taking way more risk and your cost of capital is still pretty high. And so now what you do— I'm gonna go get some leverage on my fund, I'm gonna go get some financial engineering— and you're trying to keep things going the way they've been. But the better thing is just don't take the capital and don't reduce your of the investments you're doing. So, but I would almost argue you're taking more risk now at 9% as a lender than you were at 12% a couple years ago.
