[SINGAPORE] Funds that invest in private credit globally may be poised to beat those for private equity (PE) again this year. That is especially if interest rates remain high while exit opportunities in stock markets are stymied by volatility.

An Apr 29 report by index provider MSCI shows that private credit funds generated 6.9 per cent last year, exceeding the PE funds’ return of 5.6 per cent. 2024 marked the third straight year of outperformance.

A relatively new asset class, private credit began as a source of liquidity when the global financial crisis of 2008 caused high-yield and syndicated loan markets to seize up. Demand for private credit has been growing, as tighter regulations make it more onerous for banks to lend to companies.

Interest rates on private debt are usually charged at a premium to the benchmark rates, so the asset tends to perform better when borrowing costs are rising, or not falling as quickly as anticipated.

On May 7, the Federal Reserve held interest rates steady for the third time this year. While noting that the US economy has “continued to expand at a solid pace”, the central bank highlighted that the risks of higher unemployment and inflation have risen.

This indicated the Fed has dropped “its implicit easing bias”, Ray Sharma-Ong, head of multi-asset investment solutions, Southeast Asia, at Aberdeen Investments, said in a May 8 report. The uncertainty surrounding US economic outlook due to the impact of tariffs and trade policy “makes it harder for the Fed to cut rates pre-emptively to support econo...