Tuesday, January 31, 2023

Private credit firms upbeat about rising rate test



Private credit managers are confident the sector will prove resilient as it faces a rising rate environment for the first time since its post-2008 boom.

Less than a fifth of managers surveyed by Aima’s Alternative Credit Council and Allen & Overy are taking a defensive approach, with the remaining 80%-plus either cautiously optimistic or bullish.

Respondents to the eighth Financing the Economy survey managed $805bn in private credit and deployed  $127bn in 2021, a 20% increase — but there was a pause this year brought on by changes in the macro environment.

“The investment case for private credit is still compelling in a rising rate environment as long as macro-stresses remain manageable for borrowers,” wrote the authors of the report.

“The strong secular growth we have seen in private credit has been further accelerated by the recent volatility in the public credit markets,” said Michael Zawadzki, global chief investment officer, Blackstone Credit.

“The result is an even greater opportunity set for private lenders to provide scale financing solutions at attractive terms.”

Michael Small, a partner at KKR, highlighted a “massive opportunity” in Asian private credit.

“If we consider the likely level of M&A in the region supported by private equity activity, combined with the limited depth of the local bank and bond markets, there should be strong demand for private credit,” he said.

“Many aspects of the market dynamic remind me of Europe prior to the institutionalisation of the loan market and the advent of direct lending.”

Find the full report here.

Below: Stuart Fiertz, co-founder of Cheyne Capital, discusses the risks and opportunities facing private credit in an excerpt from his AFI interview.