These are not bad times for everyone

With warnings about the state of the global economy growing starker by the day, it’s worth reminding ourselves of the misguidedness in asking whether things are good or bad for private debt. It is, after all, an asset class home to such a wide variety of strategies that within that broad stable there will always be winners and losers, whatever the circumstances faced.

The latest credit market update from fund manager Varde Partners, The Echo is Getting Louder, reflects on an investing environment that for those involved in stress and distress “has dramatically improved from where it was at the start of the year”. The firm goes on to state that “volatility has delivered very strong breadth to the opportunity set and a substantial new volume of credits to our research pipeline”.

So where is Varde seeing this opportunity? One area is disrupted sectors such as travel and leisure with valuations damaged by covid and the market now facing fears of recession and declining consumer spend in the US and Europe. But Varde believes that, in certain cases, cuts in valuations – already pricing in concerns about the future – may be “overdone” and that pricing is therefore at attractive levels.

Energy and real estate are also in Varde’s sights. In the case of the former, high energy prices and constrained supply have provided a boost for energy production and services companies, but credit spreads may only be partially reflecting this amid concerns about the economy. Real estate, meanwhile, saw “significant selling pressure” in Q2 due to rising rates and economic slowdown – but Varde believes that the market sell-off has moved ahead of the decline in fundamentals.

The firm also notes that there may be opportunities in emerging markets where credits have been “oversold and can recover” or where lenders may be able to plot a path to a sustainable future. It advises a cautious approach, however, given the extent of the problems facing emerging markets including the frightening prospect of possible food supply shortages.

For many years, there has been talk of a possible wave of distress – and plenty of capital raised as a result – with few signs that this part of the market was capable of meeting expectations. The wait may be over, as private debt reminds us of the wide range of opportunity it encompasses.

Write to the author at andy.t@peimedia.com