Recessions and bad economic crises seen as excellent opportunities for this alternative asset class
Against a backdrop of increased macroeconomic uncertainty, private credit managers remain optimistic about their companies’ future.
In the latest survey from the Alternative Credit Council, the private credit affiliate of the Alternative Investment Management Association, over 80% of worldwide private credit managers are either bullish or moderately optimistic about the market's prospects over the next 12 months, reported Institutional Investor.
“When there’s recession and difficult economic times, that’s usually a good opportunity for this asset class,” CVC Credit Partners partner Neale Broadhead said in the report. “You tend to get the best vintages out of adversity, [as] long as you have a solid investment pipeline and discipline in your investment approach.”
The research was based on a survey of 54 private credit managers with a total asset value of US$805 billion.
In 2021, respondents plan to deploy a total of US$127 billion, primarily to borrowers with average earnings of US$25 million to US$100 million.
According to Ernst & Young's most recent Global Alternative Fund Survey, 51% of investors want to raise their allocation to private credit in 2023, the largest percentage of any alternative asset class.
“I’m bullish on the ongoing growth of direct lending,” Andrew McCullagh, managing director and portfolio manager for private credit at Hayfin in the United Kingdom, commented on the ACC study. “I’m bullish in terms of it being seen by investors as a good quality, defensive, low-volatility asset class [that] gives decent returns in difficult times.”
Private credit managers are capitalizing on the tailwind by focusing on new geographic areas, the ACC report reveals.
Although the United Kingdom and the United States are still the two countries with the greatest development potential in the next one to three years, the majority of Europe and Asia have come out as appealing investment locations.
“Much of this growth is being led by the private equity market, which continues to spearhead private credit’s expansion into new markets,” the report said. “This development is likely to prove valuable for the European and Asian economies as they seek to diversify the sources of financing available to borrowers.”
Private credit managers, despite their optimism, are mindful of the challenges posed by the deteriorating economic background.
Inflation and other macroeconomic risks were cited by 55% of managers as the most significant problems impacting borrowers in their portfolios, followed by labour market restrictions and company-specific concerns.
According to the ACC research, private credit fund managers would respond to the problem "by being more selective when deploying capital [and] focusing on enterprises in non-cyclical industries, as well as those with robust cash flows and the capacity to maintain pricing power."