Private credit touts resilience amid uncertainty: IFR
Recent market volatility has demonstrated the resilience of private credit, and the asset class is well positioned to withstand any future economic turbulence, according to industry participants.
At the US Private Credit Industry Conference on Direct Lending, hosted in Nashville by the loan trade group, the LSTA, and events company DealCatalyst, speakers discussed avenues for growth, such as the proliferation of funds geared towards retail investors.
Conference speakers largely agreed that the momentary pause in the broadly syndicated loan market following US president Donald Trump's April announcement of sweeping tariffs presented an opportunity for private credit to take market share. Though market activity has since normalised, there remains a broader trend towards private markets, they said.
'Private credit has been taking share from the liquid credit markets for a while,' Kerry Dolan, managing partner at Brinley Partners, who spoke on the conference's opening panel on Monday morning, told IFR. 'We expect that shift to continue. Private credit also typically increases in popularity during times of volatility as it reduces market risk.'
Leveraged buyout activity, however, remains relatively sluggish given a slump in valuations for private equity portfolio companies and, more recently, a cloudier economic outlook given uncertainty around tariffs. Even so, said Eric Muller, portfolio manager and partner at Oak Hill Advisors and CEO of the firm's business development companies, his firm has had strong investment opportunities come its way.
'The buyouts that are happening right now are of very high quality,' Muller said during a Monday afternoon panel on large-cap lending. 'We're seeing add-ons within portfolio companies, as well as refinancings and other transactions that a borrower may need to execute right now and doesn't have the flexibility to wait.'
Good exposure
Private credit has so far been largely insulated from worries over tariffs. Several private credit managers have estimated that less than 10% of their portfolios face direct exposure to such import taxes. Investor sentiment towards the asset class has remained largely positive in the face of market volatility, Dave Donahoo, head of Americas – wealth management alternatives at Franklin Templeton, told IFR. Donahoo also spoke on a Tuesday morning panel about retail access to private credit investments.
'Private markets price on fundamentals, not market sentiment or technicals,' he said. 'So it's moments like this that the wealth management community – the individual investor – is reminded why having exposure to private markets helps their overall portfolio.'
There are concerns, however, about the impact that tariffs may have on the economy at large. A slowdown could weigh on the performance of private credit borrowers, some of which already face challenges from persistently high interest rates, as S&P noted in a May 9 report.
Nonetheless, conference speakers were largely sanguine about private credit's ability to navigate a potentially weakening economy.
'We're coming off a relatively strong backdrop if we were to head into a recession,' said Jonathan Bock, a senior managing director at Blackstone and co-CEO of the business development companies Blackstone Private Credit Fund and Blackstone Secured Lending Fund.
Certain situations, such as stagflation, are 'challenging for equities but can be okay for credit', said Colbert Cannon, a managing director at HPS Investment Partners.
Bock and Cannon spoke alongside Muller on Monday afternoon.
Sizing up
While the commentary regarding the prospects for private credit was largely upbeat, some speakers expressed caution regarding investment selection, especially as the asset class has taken on large transactions that overlap with the broadly syndicated market. Matt Freund, managing director at Barings and president of Barings BDC, said his firm is not actively seeking to chase after these large deals.
'I'm sceptical of the idea that origination is proprietary in the upper end of the market,' Freund said on a panel focused on investment strategy.
But competition is also fierce for loans to lower-middle-market borrowers, and spreads have also tightened significantly among that segment, he said.
Though his firm does not emphasise seeking larger transactions, according to Anthony DiNello, head of direct lending at Silver Point Capital, it does have strong relationships with banks, which have proven beneficial in periods of market dislocation.
'Some of our best deals come through relationships with Wall Street banks,' DiNello, who spoke on the same panel as Freund, said.
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