Briarcliffe: Private debt allocations are poised to rise
Briarcliffe Credit Partners, in a new study called The Private Credit Compass report, begins from an estimate – taken from a Wall Street Journal story in January 2023 – that over the next decade, institutional investors will increase their average portfolio allocation to private debt to 5.9 percent from the current 3.8 percent.

Briarcliffe offered PDI an advance look at this new report on the future of private credit. It maintains that due to the sharpened interest of institutions as well as to changes in the private wealth universe, private credit assets under management could top $5 trillion globally before another decade has passed.

The report also makes the point, citing McKinsey, that private credit has abundant attractions for these investors. It offers the “tightest distribution of returns of any private asset class, by a factor of two”, the report asserts. On a risk-adjusted basis, it can also be more attractive than public equities. Over the past decade, during which the S&P 500 produced an 8 percent return, private credit has captured most (92 percent) of that with only half of its volatility.

As for institutional investors, the report makes the case that part of this exponential expansion will come from insurers. Because insurers work with strict risk-based capital requirements, fund managers that want to work with them must do the same. That entails hiring dedicated staff with technical inside knowledge of the insurance industry.

Private creditors do and will continue to woo insurance money through rated notes, collateralised fund obligations, and managed accounts.

Schroders’ Julie III raises more than €320m at first close
Schroders Capital is back in market with its third European sub-investment grade infrastructure debt fund, raising more than €320 million at first close, according to our colleagues on Infrastructure Investor.

The Junior Infrastructure Debt Europe III fund (Julie III) – which launched at the end of 2022 as an Article 8 fund under the EU’s SFDR – will target brownfield core assets in the European mid-market, the firm said in a statement, investing in water, renewable energy, electricity grids and telecoms, as well as roads and railways.

The capital raised to date came from Asian and European investors, the firm said, “with the strategy benefiting from higher yields in the current rising interest rate environment”.

As for the fund’s target, Schroders eyes commitments “similar to the previous vintage Julie II”, Jérôme Neyroud, head of infrastructure debt at Schroders Capital, told The Pipeline. That fund closed on its €1 billion hard-cap in July 2021 and is now fully deployed.

Considering the fundraising slowdown seen in Q1, keeping the target size in line with the previous fund seems wise.

European defaults likely to rise, but not soar
Europe’s corporate default rate is tipped to rise over the coming months, but not to levels that would be high compared with other challenging periods in recent history.

According to S&P Global Ratings, the European trailing 12-month speculative grade corporate default rate – which stood at 2.8 percent in March this year – is expected to reach 3.6 percent by March next year. This is the so-called “base forecast”, or most likely outcome.

This is relatively high compared with a long-term historic average around the 2 percent mark, but well below the rate of more than 6 percent that was recorded during the covid/lockdown period in 2021, and the rate of around 9 percent in 2009 following the global financial crisis.

The expected rise in defaults is attributed to rising interest rates, slowing growth and still-elevated input costs, leading to falling earnings.

However, much about the economic outlook is uncertain – reflected in best- and worst-case scenarios also calculated by S&P. In the worst case, with a prolonged slowdown in growth or recession, the rate is predicted to rise to 5.5 percent. But, in a best-case scenario of falling inflation and interest rates, the rate could actually fall from its current level to 1.75 percent.

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