Fitch warns of biggest test since GFC
Ever since the global financial crisis, macroeconomic challenges for the US private credit market have proved transitory in nature and the consensus view is that the asset class has largely enjoyed tailwinds during that period. According to a report from Fitch, that’s all about to change.

Fitch acknowledges that US private credit has experienced strong growth in the past decade, beating the pace of growth in commercial bank lending. But, referring to the “first real macroeconomic test” since the GFC, Fitch says borrowers, lenders and investors now face headwinds and that “underwriting acumen” will be tested.

It says that while private credit terms were traditionally more conservative than those in the syndicated bank market, there has been some convergence due to the amount of competition in the lending market. While terms improved somewhat last year and early this year, Fitch points to concerns over the level of exposure to pre-2022 vintages with asset quality coming under pressure from rising rates and slowing economic growth.

Fitch is also concerned about higher loan concentrations in the private credit market relative to bank lenders, which could pose a threat to earnings and capital, and lead to higher losses over time. But the agency expects these risks to be mitigated by higher yields from rising rates and an expectation of a high recovery level given the secured nature of the debt and large equity cushions in deals.

A strategy for all weathers
A paper from fund manager Davidson Kempner Capital Management makes the case for opportunistic credit as a strategy that can perform well in all cycles – including the present one – and which may be seen as preferential to growth strategies, given their reliance on a favourable economic backdrop.

The reason for considering a strategic shift is the end of the “14-year zero interest rate policy”. The policy has assisted growth investors but it’s demise “requires a new investing playbook” according to Davidson Kempner.

“Investors should be mindful that what has proven successful over the past 10 years may not work as well over the next 10 years,” says the paper, highlighting the “extreme cyclicality” of growth investing. Robust returns during the 1990s and 2010s need to be balanced against the 1980s and 2000s, the paper says, when investors made “little to no money” from growth strategies.

The paper contains interesting comparative data based around relative returns, distributions and correlation for different strategies.

Science proving hard to adopt
The implementation of science-based targets by alternative investment funds appears to be sluggish, according to the latest research from RBS International.

The January 2023 study – focused on private debt as well as real estate, private equity, infrastructure and renewables – found that 43 percent of respondents had set and verified SBTs. This was exactly the same figure as in the previous survey in March 2022.

The remainder (57 percent) said they were planning to set targets at some point in the future, but RBS noted that timeframes for implementation appear to be slipping.

More than a third of those canvassed (37 percent) said the biggest issue with SBTs was the time it takes to implement them, although this was down on the 48 percent who said it was the biggest issue in the prior survey. Economic conditions was cited as a top concern by 35 percent.

Pressure from regulators was cited as the biggest reason for adoption of SBTs by 38 percent, and 41 percent expected regulatory pressure to decarbonise to increase, despite the challenging economic conditions.

SBTs are designed to provide companies and financial institutions with a defined pathway to “future proof” growth by specifying how much and how quickly they need to reduce greenhouse gas emissions.

Essentials