Private Credit and Business Cycles (Last of a Series)

The question of where we are in the business cycle may ultimately be answered only in hindsight. Similarly what triggers the next cycle will likely different than what set off previous downturns. Subprime mortgages, tech, or sovereign defaults will probably not be culprits, though fallen energy credits could certainly qualify.

Given the mature recovery, credit investors are understandably focused keenly on which part of the capital stack prospective managers play in. Yet unlike the corresponding end stage of the last cycle, rates remain at rock-bottom. It’s hard to remember now, but Libor in September 2007 was 5.5%. Today it stands at 0.44%.

Growth has also been severely challenged. First quarter US GDP barely registered at an anemic 0.5%. Even Italy – that engine of European capitalism – did better at 0.7%. Given how weak global economies are, it’s hard to imagine a precipitous downturn. Tough to crash your plane when you’re flying one foot above the ground.

Chris Godfrey at CEPRES highlights the connection between capital availability and cycle timing. “Our analysis is that the biggest determining factor of future returns is volume of capital in the market. It’s a direct correlation. If we see significantly increased capital, then future value in that segment deteriorates.”