The global private credit market is currently under increased scrutiny. Recent bankruptcies and strict redemption restrictions in offshore retail-focused debt funds have raised significant concerns. Major players like Blue Owl Capital, Morgan Stanley, and BlackRock have set withdrawal limits, triggering a notable confidence shock. This situation, driven by a fundamental mismatch between wealthy investors’ liquidity expectations and the inherently illiquid nature of private debt assets, highlights a key difference for South African private debt: its local market operates under fundamentally different, more insulated conditions.
By: Conway Williams, Head of Credit at Prescient Investment Management.
The stresses in offshore private credit markets are multifaceted. Much pressure comes from funds that ‘democratised’ private credit, giving high-net-worth investors access to institutional-level yield premiums. These investors often lack the structural patience for illiquid assets, increasing redemption pressures, as seen with Blackstone Private Credit Fund and Morgan Stanley’s North Haven Private Income Fund.
While some analysts consider the stress isolated, a deeper look suggests that potentially significant credit risks might be obscured by structural opacity. Concerns include potentially inflated Net Asset Values (NAVs) and strained interest coverage ratios for highly leveraged mid-market borrowers in a 'higher-for-longer' interest rate environment. The offshore market's disproportionate exposure to software and technology, coupled with covenant-lite loans, exacerbates vulnerabilities as AI disruption erodes the competitive 'moat' around many traditional software-as-a-service (SaaS) businesses.
In stark contrast, the South African private debt market is structurally insulated from more volatile offshore dynamics. The local market is mainly composed of institutional investors, such as pension funds and life insurers, operating under strict regulations, including. Regulation 28 and Board Notice 90. This inherently patient, longer-term investor base aligns well with the illiquidity of the underlying assets, effectively preventing the 'run on the fund' scenario seen offshore. Unlike highly leveraged, sponsor-backed mid-market corporates abroad, local private credit transactions in South Africa often focus on tangible assets in critical sectors such as infrastructure, clean energy, and other real-economy areas. These often benefit from government or Development Finance Institution (DFI) support. This conservative leverage and prevalence of institutional investors are key structural differences.
Furthermore, South Africa primarily operates as a ‘buy-and-hold’ market, with investors typically holding instruments until maturity. This insulates against sentiment-driven price spirals, even if secondary-market trading is limited and mark-to-market prices might not always fully reflect true fair value. The connection between credit spreads and default risk here is also more nuanced than in highly liquid global markets. Local supply-and-demand imbalances can lead to compressed spreads even with elevated credit risk, or spreads can widen for purely technical reasons unrelated to actual default risk. Prescient Investment Management’s Credit Cycle Indicator, based on top-down analysis, currently suggests slowly improving credit conditions, along with longstanding spread compression.
Global events are closely monitored for insights, but in our experience, their direct relevance to the South African private debt landscape is quite limited. Local market participants actively learn from these global occurrences to ensure their investment strategies are well positioned. For example, multi-asset income funds operating under Regulation 28 maintain very limited private-market exposure, typically consisting of structured, defensively positioned local instruments. This further shields them from aggressive offshore leverage risks. Dedicated private market funds consistently focus on strict origination standards, conservative underwriting practices, and disciplined ongoing monitoring.
Opacity is not seen as a desirable feature of private markets; instead, it is viewed as a substantial risk that must be actively managed through clear, timely communication with investors.
The current offshore narrative, often confused by the distinction between syndicated loan exposures and private direct lending, and further complicated by concerns about AI-driven disruption, underscores a fundamental tension in the ‘democratisation’ of private credit. The recurring lesson, clearly demonstrated by the performance of money market funds during the Global Financial Crisis and in real estate Business Development Companies (BDCs) in 2022–2023, is that liquidity transformation inherently involves risks that demand transparent disclosure and thorough understanding by all investors.
For South African investors, the key takeaway is clear: the local market’s unique structural features, such as patient institutional investors, a more conservative leverage approach, a predominant buy-and-hold investment strategy, and distinct supply and demand dynamics, collectively offer a natural and effective buffer against the retail-driven liquidity mismatches currently plaguing offshore semi-liquid funds.
Although South African private credit is not devoid of risks, we believe that the specific challenges seen offshore are not directly applicable to the local market. Therefore, market participants must continuously analyse global events, not as immediate threats, but as valuable lessons.
By proactively leveraging insights from these international experiences, the South African private debt ecosystem can strengthen its resilience, protect investments, and ensure stable, robust performance for clients, all while building confidence through its unique strengths and proven adaptability.
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