Share this report:
January 2024 | Issue 260
News
Managers advise caution despite upbeat outlook for private credit
Managers advise caution despite upbeat outlook for private credit
Kellie Ell
Reporter
The golden age of private credit isn’t over yet. In fact, industry experts remain bullish, anticipating continued growth.
Asset management giant BlackRock said earlier this fall that the global private debt market would reach $3.5 trillion by 2028. A report by Morgan Stanley put the market’s value at $1.4 trillion at the start of 2023.
Ed Goldstein, chief investment officer for Coller Credit Secondaries, part of Coller Capital, says: “In terms of your primary private credit, the main reason for it being the golden age is that rates are higher. If you were lending money 18 months ago at Sofr+ 600, today you’re getting paid 11% or more.”
Despite the generally upbeat outlook, experienced managers advise caution. Patrick Marshall, head of fixed income — private markets, at Federated Hermes, says the sustained high interest rate environment will benefit investors who have backed conservative direct lending funds.
“Companies burdened with high levels of leverage will continue to struggle under the increased cost of debt. This will put pressure on their debt service coverage covenants and will cause increases in defaults,” he says. He also believes fundraising will become difficult for aggressive funds as investors continue backing conservative strategies.
“Investors will continue backing conservative strategies”
Patrick Marshall, Head of fixed income — private markets | Federated Hermes
In Europe, Mattis Poetter, partner and co-chief investment officer at Arcmont Asset Management, has a similar message. “2023 was a strong year for private debt and we expect activity to rise in 2024,” he says. “The sector is likely to remain overweight on defensive, cash-generative industries, such as technology, business services and healthcare.
“Financing will remain available for strong companies, but weaker issuers may struggle and will need to tap more opportunistic capital solutions-type funds early to avoid liquidity issues.”
Whichever side of the Atlantic you look at, the story of increasing default rates seems to be inspiring investors to turn to niche strategies.
According to David Ross, managing director and head of private credit at Northleaf Capital Partners, asset-based specialty finance is the next frontier for private credit investors as they seek to diversify outside of their core direct lending allocations.
“We see a particularly attractive opportunity set in esoteric niche verticals, which provide investors with high cash yield and unique portfolio risk-return benefits given low correlation to market/macro factors,” he says.
Raphi Schorr, partner and deputy chief investment officer at HighVista Strategies, also sees opportunities as highly leveraged borrowers struggle.
“We are particularly excited to provide credit to borrowers with high-quality collateral that might fall outside of traditional credit underwriting frameworks,” he says. He likes technology businesses with barriers to entry and sticky customer bases that lack traditional profitability metrics.
The final word goes to Nils Rode, chief investment officer, private assets, for Schroders Capital. In its Schroders Crystal Ball 2024 Investment Outlook he advises investors to take a long-term view.
“Strategies and investments should be evaluated for their suitability for the new world we are entering,” he says. “The 3D reset [decarbonization, demographics and deglobalization], the AI revolution, and the private markets slowdown and higher global interest rates mark a new era for private assets investment.”
Share this article:
Global credit funds & CLO's
January 2024 | Issue 260
Published in London & New York.
Copyright Creditflux. All rights reserved. Check our Privacy Policy and our Terms of Use.