The Fund’s credit strategy is focused on Direct Lending — the predominant asset class in the private credit universe. Direct Lending includes any debt held by — or extended to — privately held companies, and it most commonly involves non-bank institutions making loans to private companies. 

The private company is obligated to pay back the full sum of the loan, plus interest, to the lending institution. Direct loans are senior in the capital stack or the structure of all capital that is invested into a company, secured by collateral, and offer floating interest rates.

NON-BANK LENDER sources and structures each transaction directly with the borrower.

PRIVATE COMPANY relies upon the lender to support ongoing growth initiatives.

PRINCIPAL & INTEREST, the borrower is obligated to pay back the full loan principal, with 
interest, in accordance with the deal terms.

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As recessions approach and sink in, banks tighten their lending. To provide context, loan growth at commercial banks decreased substantially and remained negative for almost four years after the 2007-08 financial crisis. 

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With over 70 banks having failed in 2023, many banks have become more reluctant to lend money to businesses and households — an intended side effect of the Fed's rate-hiking campaign.

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Why it matters: New research shows that phenomenon playing out to an extraordinary degree. Making credit more expensive and harder to get will weigh on economic activity and quell inflation.

• This spring's bank failures may have also sped up that process, though the extent to which that has happened remains unclear.

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What's new: An analysis from Evercore ISI finds that the shift in bank lending standards has been the swiftest, and most dramatic, of any recent episodes of monetary policy tightening.

• In some ways, that's to be expected: Easy lending conditions after the pandemic recession were met with a fierce campaign to cool down the economy in 2022.

• Banks responded in kind: A surge in inflation and higher rates on the horizon gradually made firms more reluctant to lend, for fear of how borrowers would handle the macroeconomic backdrop.

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Where it stands: The latest Senior Loan Officer Opinion Survey shows the largest share of banks (a net 51%) reporting tighter lending standards for larger and medium-sized firms since the period following the onset of the pandemic and, before that, the 2008 financial crisis.

• In August 2023, Fed chair Jerome Powell said the economy is "facing headwinds from tighter credit conditions for households and businesses, which are likely to weigh on economic activity, hiring, and inflation."

 

The intrigue: In previous periods when banks tightened credit, the Fed lowered rates to encourage bank lending to grease the wheels of the economy.

• "This is what makes this cycle different from others. In the past decades, conditions at some point became very tight, but it was not because of the Fed," says Casiraghi.

• Then, "the Fed was trying to undo that, in some sense, because they were cutting rates to try to make credit flow to the economy. Here, we have the opposite."

 

Of note: An easy explanation for the historic shift in credit standards is just that the Fed has raised rates by a historic amount in a short period.

• But even adjusting for the magnitude of rate hikes, "the tightening in credit standards observed now is twice as large as what it was" compared to the 2004-2006 tightening cycle, Casiraghi says.