Private credit sheds its ‘monolith’ reputation with advisers
Advisers and investors are starting to recognise that private credit encompasses a range of strategies beyond corporate lending as they look to leverage its strong returns and diversification benefits, according to PIMCO.
As of September 2024, data from Preqin suggests the private credit market totals nearly US$2 trillion globally.
Addressing the massive growth of the asset class, Kyle McCarthy, alternative credit specialist at PIMCO, noted it has nearly doubled in size in the last five years “for pretty good reason”.
Among the many benefits of the asset class for end investors, private credit is able to deliver consistent and stable income and yields a bit above the public market, he said.
“There’s a lot of defensive qualities and defensive characteristics being senior secured, sitting on top of the capital stack, and it offers a lot of diversification benefits to investors as well,” McCarthy explained.
He also noted that, with its growing popularity, investors are beginning to shed misconceptions that it is a monolithic asset class.
In October, a global survey by Schroders revealed over half (55 per cent) of financial advisers globally said they are already investing in private assets. A further 19 per cent said they plan to do so in the next one or two years.
“Investors are warming up to the fact that private credit isn’t just a monolith anymore – it’s not just corporate direct lending, or it’s not just property or commercial real estate-based lending, but it’s including other things like asset-based lending as well, which is a big theme at PIMCO and an area that we’ve focused on for over a decade now,” he said.
PIMCO finds “a lot of value” within this space, offering additional diversification beyond corporate direct lending and property.
“[It’s] an area where, as we think about the next phase and where this de-banking trend is occurring or where banks are retrenching or in retreat, is in this asset-based lending space,” he said.
“So whether it’s consumer-related credit, whether it’s mortgages, whether it’s non-consumer or other forms of hard asset-backed lending like aviation finance for example, these are all areas where we’re seeing a significant amount of opportunity today.”
However, this remains a space that requires skill and expertise, McCarthy pointed out, warranting a strong focus on manager selection as credit spreads appear relatively tight across the board.
“I think investors should be asking the question of if there is a growth hiccup or if growth slows, or we do get an unexpected recession, what does that mean for private credit?” he said.
“You’re already seeing early signs of elevated rates biting for borrowers. Payment in kind, or PIK, as they call it, which is a forward indicator of potential stress going forward, is essentially when you take a loan and the interest, instead of being paid in cash, is added to the balance of the loan. So, you're essentially kicking the can down the road in many cases, and you’re starting to see that creep into more and more private credit portfolios.
“Again, [it’s] something to track not necessarily at alarming levels at the moment, but something important for investors to keep on the radar.”
Money Management previously explored the crucial role of manager selection in achieving optimal private market returns, given the considerable differences between these types of funds and their listed counterparts.
Speaking on an Institute of Managed Account Professionals webinar last month, Fred Pollock, chief investment officer at GCM Grosvenor, highlighted the distinct qualities of private equity and private credit managers, describing them as “almost spiritually different animals” in terms of where they sit in capital structure.
PIMCO’s McCarthy echoed the sentiment, explaining manager selection is paramount.
“Look at track record, look at history in the space, whether they have teams internally to work through restructurings and work through potential credit distressed assets,” he said.
“The market really hasn’t seen a real test in terms of the distress cycle yet, so it is an important question for investors to be asking.
“I would just encourage them to really think carefully about manager selection and ensuring they’re partnering with someone with a lot of experience.”
AUTHOR
Rhea Nath
Recommended for you
The investment giant has announced a $18 billion deal to acquire a leading US-based private credit manager, marking its third major alternatives deal this year.
Yarra Capital Management has received a top rating for its Enhanced Income Fund from research house Lonsec.
Abrdn’s head of global fixed income sees a favourable environment ahead for bond investors, though he cautions a more selective investment approach might be necessary to navigate lingering risks.
Pacific Current Group has completed the divestment of its holding in Carlisle Management Company to alternative asset manager Abacus Life.
