After outperforming public markets in recent years, how will credit markets adapt to a low-yield, inflationary environment, and where are investors finding opportunities to generate alpha across the spectrum?
Private Debt and Private Credit: Seizing Opportunities in Today's Evolving Market
The Market Group 8th Switzerland Institutional Forum, hosted at the Zurich Marriott Hotel on November 11th, 2024, provided a vibrant platform to explore one of the private market’s fastest-growing asset classes: private credit and private debt. These vehicles continue to gain momentum among institutional allocators and private money managers, offering a blend of attractive returns, diversification, and portfolio resilience.
The panelists unanimously acknowledged that the terms "private credit" and "private debt" are often used interchangeably to describe the same asset class. While this reflects the evolving nature of the industry, it also highlights the need for clarity when discussing specific strategies or subsegments within this broad market.
The private credit market has experienced impressive growth since 2018, with assets under management surpassing $1.6 trillion—a remarkable increase of over 20% since December 2022. Its ability to deliver higher risk-adjusted returns, consistent income streams, and enhanced diversification has made it a cornerstone of modern investment strategies, particularly in today’s complex economic environment.
In today’s evolving financial landscape, investors are increasingly seeking assets that offer an optimal balance of yield, safety, and stability. Private credit and private debt stand out by delivering these advantages, setting themselves apart from traditional fixed-income investments and unlocking diverse opportunities for portfolio optimization.
A Tribute to Our Panelists
Moderator:
Marie-Laure Mikkelsen, Founding Partner, Alfinas Alternative Investment Advisers
As the moderator of the panel discussion titled "Opportunities in Private Credit and Private Debt," I had the privilege of leading an insightful dialogue with three distinguished panelists:
Moritz Zander, Head of Investments, New Reinsurance Company
Martin Fahr, Managing Director, Aksia
Jamie Clark, Director – Infrastructure Debt, EMEA, MetLife Investment Management
Their expertise shed light on intricate topics such as balancing risk and return, integrating technology and ESG principles into investment strategies, and identifying emerging opportunities within the private debt landscape. Their insights seamlessly blended strategic vision with practical solutions, providing valuable guidance for navigating the complexities of today’s market environment.
Key Insights from the Discussion
The Allure of Private Credit
Private credit is increasingly favored by investors for its potential to deliver higher risk-adjusted returns compared to public markets. Its key benefits—enhanced diversification, consistent income streams, and relative stability—make it an attractive option in both low-interest-rate environments and periods of rising inflation. These characteristics position private credit as a versatile component for building all-weather resilience in investment portfolios.
Diverse Opportunities Across the Credit Spectrum
While the asset class is notably wide-ranging, our discussion primarily focused on the lower-risk end of the spectrum, such as direct lending and infrastructure debt. These subsegments offer attractive features, including predictable cash flows, lower volatility, and strong risk-adjusted returns, making them particularly appealing for investors seeking stability.
Direct lending, with its floating-rate structures and tailored loan terms, provides natural protection against rising interest rates. Meanwhile, infrastructure debt stands out for its resilience and long-term stability, offering a compelling investment for those with a longer horizon and a focus on reliable income.
This nuanced range of options across the private credit market enables investors to diversify their portfolios effectively while aligning their strategies with their risk tolerance and broader investment goals.
Risk Management Imperatives
The panelists highlighted that effective risk management is fundamental to success in private credit investing. They stressed the importance of rigorous due diligence and strategic asset selection to uncover high-quality opportunities while mitigating risks, particularly in niche or emerging market segments where data transparency and reliability may be limited.
Successful private credit investing relies on a disciplined risk management approach, with the following core elements: Thorough Credit Analysis: Assessing borrowers' financial health, cash flow stability, and repayment capacity is crucial for making informed investment decisions.
Robust Structuring and Covenants: Implementing protective loan terms and covenants provides early warning mechanisms and greater control in cases of borrower stress.
Monitoring and Active Management: Ongoing oversight of portfolio companies and market conditions ensures performance is maintained and risks are detected early.
Together, these practices form a comprehensive framework for navigating the complexities of private credit, enabling investors to maximize returns while minimizing risks.
The Appeal of Direct Lending
Direct lending emerged as a focal point, with panelists highlighting its attractive yields and floating-rate structures that naturally hedge against rising interest rates. continues to gain traction as one of the most attractive subsegments of private credit. Panelists highlighted its ability to deliver compelling yields and stability, even in uncertain economic conditions.
In Europe, direct lending has experienced remarkable growth, with deal volumes reaching €52 billion in the first half of 2024—an impressive 85% increase year-on-year. This surge underscores the resilience of the market and its role as a preferred financing option for borrowers, particularly as banks pull back from lending in the wake of tighter regulations.
Additionally, the yield premium in direct lending is a key attraction for investors. For example, the average yield to maturity for European senior debt stood at 9.2% in Q4 2023, significantly outperforming the 5.9% average yield of broadly syndicated loans. This premium, combined with the lower volatility typically associated with private loans, makes direct lending a standout choice for those seeking consistent income and diversification in their portfolios.
The panel also emphasized the importance of floating-rate structures within direct lending, which act as a natural hedge against rising interest rates. This feature further enhances its appeal as a robust and versatile asset class, providing stability and flexibility to navigate volatile economic environments.
Discussion Synthesis
As a new entrant in the asset class, #Moritz Zander's contribution was particularly insightful. He shared valuable perspectives from New Reinsurance Company’s entry into private credit just two years ago. Their strategy focuses on capturing liquidity premiums and achieving risk-adjusted returns through targeted investments such as direct lending. His highly focused approach aligns with the broader market consensus among investors, highlighted by the recent surge in investments and inflows into private credit—a point reinforced by Martin Fahr during the discussion.
#Martin Fahr addressed concerns about potential market saturation and return dilution resulting from the rapid pace of new inflows. He emphasized that the growing number of players and investors in private credit broadens market opportunities rather than constraining them. His perspective underscores the sector’s depth and resilience, as well as its ability to deliver attractive returns with low volatility, even in times of economic uncertainty.
#Jamie Clark highlighted the appeal of infrastructure debt that offers a premium over corporate bonds, providing enhanced yield while maintaining downside protection. This premium can vary based on market conditions and specific deal structures. For instance, in the European market, junior infrastructure debt has been observed to provide returns around 6.5%, which is relatively attractive when considering the additional covenants and collateral compared to equivalently rated European high-yield bonds. These higher yields, coupled with the essential nature of infrastructure assets, make infrastructure debt an appealing option for investors seeking enhanced returns with a focus on capital preservation. Clark emphasized the importance of a patient approach, supported by thorough due diligence and professional expertise, to maximize the potential of these investments.
The panel unanimously agreed that the primary objective in private credit is to capitalize on liquidity premiums rather than pursue alpha. This focus reinforces the need for disciplined strategies, especially for new entrants navigating this expansive and complex market.
Closing Remarks
A heartfelt thank you to our panelists for their invaluable contributions, and to the Market Group team for flawlessly organizing this event. Your dedication to curating thought-provoking discussions and bringing together an engaged audience made this experience truly memorable.
To the audience: your enthusiasm, thoughtful questions, and active participation were instrumental in making this panel a success. Thank you for joining us and contributing to this enriching exchange of ideas.
Continuing the Conversation
This discussion is only the beginning. How are you navigating the risks and opportunities in private credit today? What trends or strategies are you prioritizing for 2024 and beyond?
Let’s keep the dialogue going and collaborate to unlock the full potential of private credit and private debt investing.
Team Alfinas
Learn More
For more information about the 8th Switzerland Institutional Forum and to explore the full program, visit the Market Group website: Introduction | MarketsGroup.
You can also download the program directly here:
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