Private Credit Premium Persists Despite Spread Compression, AllianceBernstein Head Says

In Brief:

Matthew Bass, head of private alternatives at AllianceBernstein ($65B AUM), appeared on Bloomberg's "The Credit Edge" podcast to discuss the rapid evolution of private credit markets. Against a backdrop of economic uncertainty, trade tensions, and geopolitical risks, Bass explained how regulatory changes since the global financial crisis have pushed banks to reduce corporate lending, creating space for private capital. He highlighted that private credit offers borrowers greater flexibility and certainty of execution while providing investors better risk control through direct origination, deeper due diligence, and covenant protection – benefits particularly valuable in today's volatile environment.

Big Picture Drivers:

• Bank retreat: Post-financial crisis regulations reduced traditional bank lending, creating opportunity for private capital

• Execution certainty: Borrowers value flexibility and certainty from private lenders, willing to pay premium

• Risk control: Direct origination allows better due diligence and custom covenant structures

• Locked capital: Long-term investor commitments provide crucial stability during market stress

Key Topics Covered:

• Market scale: Private corporate credit has grown from $150B pre-financial crisis to $1.5T today

• Retail access: Increasing retail involvement through ETFs creates liquidity mismatch concerns

• Bank partnerships: Major institutions like JP Morgan entering direct lending through partnerships

• Real estate recovery: Commercial property markets bottoming with bifurcation between quality tiers

Key Insights:

• Illiquidity premium: Private credit consistently commands 150-200 basis points over comparable public debt

• Symbiotic relationship: Banks partnering with private capital rather than competing directly

• European opportunity: Less efficient European markets offer better structure and terms

• Risk mitigation: Private lenders can identify issues early and negotiate solutions before default

By The Numbers:

• $1.5 trillion: Current size of corporate private credit market, equal to high-yield and leveraged loan markets

• 100 basis points: Spread compression in middle-market direct lending over past year

• 10%: Current unlevered gross return in corporate direct lending, down from 12% a year ago

• 50-200 basis points: Range of illiquidity premium depending on credit quality

Memorable Quotes:

• "The beauty of this asset class is the time it gives you to work out of issues." - Matthew Bass

• "We're certainly positioning for a higher, for longer environment from a rate perspective." - Matthew Bass

The Wrap: Private credit's growth stems from fundamental shifts in how capital flows to borrowers, with banks, public markets, and private investors constantly rebalancing based on economic conditions. Bass sees significant runway for further expansion as asset classes beyond corporate lending open to private capital. While liquidity mismatches in retail products and blurring lines between public and private markets present challenges, the structural advantages of locked capital and direct borrower relationships should sustain private credit's appeal through market cycles.