Of all the legacies of the global financial crisis, the decline in bank lending to businesses has been one of the most persistent. A recent report from the Organisation for Economic Cooperation and Development (OECD) showed new bank lending to small and medium-sized enterprises (SMEs) has continued to fall in most of the countries where data is available, despite generally improving corporate and credit conditions.

There are a variety of factors behind this trend, from regulation to lending becoming less profitable. But the end result is that many deserving companies with solid business models aren’t getting the funding they need from banks, and are searching for alternative sources of capital. That has created a significant opportunity for investors in private debt, who can step in where banks may be unwilling, and cultivate the potential for better yields in the process.

Investors are flocking to private debt for good reason. Private debt investment can offer a measure of protection in a rising interest rate environment; diversification due to its generally low correlation to traditional asset classes; and an attractive risk/return profile, especially as investors can in many cases opt for a senior position in the capital structure that further reduces the risks associated with defaults.

However these benefits come with the need for a different, more structured investment approach versus mainstream assets. One of the critical factors to consider in private debt investment is the credit cycle - i.e. the expansion and contraction of overall access to credit over time. Based on this US private debt deserves particular attention.

By our assessment the US economy is in a ‘late expansion’ stage of the cycle, when default rates are low, spreads are tightening and many investors are holding onto their capital due to a relative shortage of potential deals and uncertainty about what’s coming next – resulting in a large pool of unused assets, or ‘dry powder.’

While this environment argues for caution, it does not warrant inaction. The investors willing to pursue deals and build out private debt programs now will be the best placed to gain in the subsequent contraction stage of the cycle, when capital will likely be generally less available and more companies will be seeking funding – resulting in more value opportunities.