Spotlight on private credit
Investors help you make sense of the different components of this growing asset class
“We need to be very cautious as to what major economic and structural issues we may face in the coming years. Over the past 10 to 15 years, private credit has been driven by private equity multiple expansion because of quantitative easing. Today, it’s about balance sheet, margin and cash flow strength. What does this mean for credit underwriting, especially when there’s so much dry powder out there? We need to determine through our due diligence that a GP is not underwriting under pressure to invest – the pressure from dry powder is a risk factor to investing.” - Corrado Pistarino, Chief Investment Officer, Foresters Friendly Society
“With the rise of private credit comes increased oversight. As regulators start to look more closely at our industry, it’s our duty assist and educate them, be more transparent and act responsibly so rules don’t shackle innovation. The current most common complaint from regulators is a lack of transparency – that should be an easy win and we should not be afraid of it. Another issue is that the same loans may be priced differently by different managers. That will always happen, but we need to educate and act responsibly here. Regulators will focus on valuations, leverage, liquidity mismatches and correlations with other industries. Let’s be proactive and ensure the regulations that come into force are fit for purpose.”- Paul Burdell, CEO, LCM Partners
“Most of our managed accounts become effectively evergreen if we do our job well. Most of our clients want constant exposure that is steady state and where re-investing makes up a large part of the new commitment activity. It’s easy to find fault with closed-end fund structures, but there is a charm in their simplicity. Many of our investors start out by thinking they want to look at full evergreen structures, but it quickly becomes apparent that, depending on preferences and needs, the drawbacks and complications can cancel out their benefits.” - Jakob Schramm, Partner, Head of Private Credit, Golding Capital Partners
“The largest emerging opportunity for us is in commercial real estate. Covid did to the office market what Amazon did to the retail space – it changed the purpose and usage of the asset type. This happened independent of interest rates, but when you add these in, it creates a double stress event for the asset class.” - Chris Hentemann, Managing Partner and CIO, 400 Capital Management
“I don’t necessarily look at the total yield investors receive, I look at the spread. Even when interest rates are low, private credit was making a comparable spread, which makes it an attractive asset class whether or not interest rates are high.” - Andrew Lockhart, Managing Partner, Metrics Credit Partners,
“The first lesson we took from our experience of managing a direct lending portfolio through the GFC is that you cannot fully replicate having to manage a sizeable loan portfolio through broad economic strain from a textbook – it is not the same as a one-off work-out. The second lesson is that, as a lender, you cannot presume you know what the owner will do when a company runs into problems, especially when they are a result of broad-based economic issues. This is why you need to focus on the fundamental credit underwriting in every investment you make. As a lender, you ultimately carry the downside risk, and you need to understand the nature of that risk.” - Anthony DiNello, Head of Direct Lending, Silver Point Capital
