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Outlook Private Credit

Disclaimer: The information and materials prepared are for internal use only and on how the Dancap Family Investment Office (“Dancap”) views current market dynamics. Dancap does not guarantee the accuracy or completeness of the material and it is not intended in any manner to be investment, financial, legal, accounting, tax or other advice and should not be relied upon.

Dancap's Current Private Debt Strategy

May, 2023

Dancap has over 20 years of track record investing in private debt through third party fund managers and co-investments. This market overview focuses on Dancap’s private debt holdings as they relate to our current investment strategy and geographic allocation and looks to provide an update on current market dynamics, outlook, and future risks. 

The majority of Dancap’s private debt portfolio is currently comprised of third-party managed funds focused on U.S. senior secured, floating rate, sponsor-backed, corporate lending strategies. With modest use of leverage, this strategy can offer strong risk-adjusted returns, downside protection, and stable income, particularly in a rising interest rate environment. Our private debt managers have deep track records across market cycles and look to team up with sponsors who have demonstrated expertise in their fields.


Our senior secured lending strategies target minimum returns of net 10% IRR, while our second lien and mezzanine strategies target minimum returns of net 15% IRR.

US Private Debt Strategy

The current economic environment is characterized by high inflation and a tight monetary policy, with the Federal Reserve unlikely to pivot towards lowering interest rates until inflation is clearly trending towards its 2% target. Federal Reserve Chairman, Jerome Powell, has stated that the Federal Reserve will use its tools “forcefully” to attack stubbornly high inflation, even if this means households and businesses may experience some pain due to higher interest rates, slower growth, and softer labor market conditions.


Against this backdrop, corporate earnings are already declining, posing challenges for many companies, particularly those that are highly leveraged and have cyclical business lines or are experiencing wage and manufacturing cost pressures. The coming quarters are expected to bring several downgrades and defaults in the speculative grade corporate credit market.

S&P Global - Projected Default Rates for US Speculative Grade Corporate Issues

Sources: S&P Global

Moody’s recently analyzed more than two hundred B3-rated corporate borrowers with nearly $300B in debt and discovered that 47% would not be able to cover their interest expenses at current interest rates of 5%. Moreover, 60% of borrowers would have negative cash flow at the current SOFR base rate (4.8%). Moody’s estimates that assuming a 5.0% Fed Funds rate, 62% of B3-rated corporate borrowers will become cash flow negative, indicating that they will need to burn cash to service their debt payments. This situation could be exacerbated by increasing interest rates and weaker corporate earnings, particularly for lower-rated leveraged loan issuers.

Source: Marathan Asset Management – The 2023-2024 Credit Cycle Public & Private Credit Outlook & Opportunities

According to Marathon Asset Management, despite most companies having sufficient liquidity to withstand cash burn, a considerable proportion of B3-rated companies will have insufficient liquidity, with approximately 60% being vulnerable to ratings downgrades. A downgrade of one notch could result in a CCC rating, which often leads to additional selling pressure as the probability of default for CCC-rated companies increases significantly compared to the B3-rated cohort. In the event of declining earnings and/or a prolonged recession, B3-rated credits could drop by 20%+ as a result of just one notch rating downgrade. This impending wave of downgrades in the loan market could present opportunities in the private credit markets.

According to Marathon Asset Management, despite most companies having sufficient liquidity to withstand cash burn, a considerable proportion of B3-rated companies will have insufficient liquidity, with approximately 60% being vulnerable to ratings downgrades. A downgrade of one notch could result in a CCC rating, which often leads to additional selling pressure as the probability of default for CCC-rated companies increases significantly compared to the B3-rated cohort. In the event of declining earnings and/or a prolonged recession, B3-rated credits could drop by 20%+ as a result of just one notch rating downgrade. This impending wave of downgrades in the loan market could present opportunities in the private credit markets.

United States Private Debt Outlook

According to Preqin, the private debt market has expanded from less than $500M ten years ago to over $1.4T by the end of 2022, with projections indicating that it will nearly double in size to $2.3T by 2027. Despite the volatility in credit markets in 2022, the private debt market had a strong year, with private credit lending reaching $200B, up from $156B the previous year, according to PitchBook data. Meanwhile, institutional leveraged-loan issuance dropped by 63%, and high-yield bond issuance fell by 78% in 2022 from the previous year. Institutional investors continue to allocate to the asset class, with North American pension-fund allocations in private debt reaching an eight-year high in 2022. Federal Reserve data and pension financial reports show that these institutional investors have allocated 3.8% of their overall portfolios to the asset class, still well below their average target allocation of 5.9%.


In volatile markets such as those experienced in 2022, private debt proved to be an attractive option for many borrowers due to its ability to provide higher leverage solutions for the right credit, along with fixed terms and execution without syndications. Private credit funds performed well last year, outperforming major fixed-income investments with a return of 4.2% in the first nine months of 2022, according to the most recent data available from the Cliffwater Direct Lending Index. In contrast, US high-yield bonds experienced a loss of 14.7%.

To see the Dancap Private Credit Investment Criteria and Portfolio, please click here.