Private debt
How is private credit positioned to circumnavigate the challenges ahead?
3 min read 30 Nov 22
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In the current inflationary, rising rate environment, private credit may be well-placed to help steer through the various challenges ahead due to its largely floating-rate nature, as well as other attractive structural features.
Inflation is hitting hard – reaching levels not seen in decades, impacting all aspects of the economy and eroding purchasing power in real terms. A slow response from global central banks has allowed inflation pressure to intensify, meaning businesses face rising input costs.
“The dynamic and diversified private credit asset universe could offer relative resilience in current conditions.”
The World Bank has warned that rising interest rates could trigger a global recession in 20231. All the while, central banks continue to hike rates in a bid to combat soaring inflation.
Uncertainty reigns – over the path of energy prices and labour, conflict in Ukraine, as well as supply shortages – clouding the longer-term outlook for inflation and growth, and also the shape of response from policymakers.
These shifting macroeconomic and market conditions suggest there may be a need to be more cognisant of risk and its changing nature within credit portfolios. But with macroeconomic uncertainty leading to dislocation and dispersion across public credit markets, opportunities may arise for investors and borrowers seeking flexible, patient and long-term capital.
“Credit markets are currently experiencing one of the most challenging periods since the Great Financial Crisis and it is likely that there is more volatility ahead. Private credit has benefited from investor demand for floating-rate debt as they seek to protect their portfolios against rising interest rates,” explains Karen Lam, Head of Investment Specialists, Private Credit at M&G Investments.
“Given this uncertain backdrop, we continue to adhere to our credit process, paying particular attention to robust bottom-up analysis, disciplined credit underwriting and appropriate diversification, therefore ensuring that portfolios are optimised to provide steady long-term risk-adjusted returns for our investors.”
Why private credit?
The past decade has seen a global search for yield with investors increasing their allocations to private and alternative credit. Data from Preqin forecasts that assets under management in private debt are set to reach $2.3 trillion by 20272.
Today, private credit investors remain well-compensated for taking illiquidity (read: complexity) risk, but the new paradigm of high inflation rising rates and uncertainty surrounding the global economic outlook, are driving alternative motivations for investing in private credit up the priority list. There are various reasons for this.
Private credit – when investors lend directly to an individual or a bank and the debt is not issued or traded on public markets – has the ability to offer exposure to alternative and differentiated assets that can generate a range of outcomes. These include enhancing risk-adjusted returns, generating potentially reliable income streams, or diversification of core holdings. This means the asset class could potentially play a variety of roles in a broader portfolio.
Private credit spans a broad spectrum of investment opportunities across the capital structure that can target a range of different risk/reward profiles for investors.
Unlike more traditional asset classes, we believe private credit is inherently less sensitive to the movements of global markets as most assets are model-priced helping to reduce mark-to-market volatility, and they are typically held until maturity.
In our view, the dynamic and diversified private credit asset universe could offer relative resilience in current conditions, compared to traditional asset allocations.
Learn more about private credit investing
1 World Bank Group, “Is a Global Recession Imminent?”, (worldbank.org), 15 September 2022.
2 Preqin, “The Future of Alternatives in 2027”, (preqin.com), 5 October 2022.
The value of investments will fluctuate, which will cause prices to fall as well as rise and investors may not get back the original amount they invested. Past performance is not a guide to future performance. The views expressed in this document should not be taken as a recommendation, advice or forecast.