Principal, Meketa Investment Group
Managing partner and head of investor relations, MV Credit
Head, Investcorp Credit Management
Principal and global private debt specialist, Campbell Lutyens
President and CEO, Churchill Asset Management
Managing director and co-head of credit investments, Cambridge Associates
What is the most exciting development?
KK: We are seeing a secondary market emerge for private credit fund interests. Given the income dynamic of these investments, this market could develop significantly.
ND: Fragmentation of the product offering. More sponsors are tempted to syndicate facilities themselves to private debt investors through club deals or pre-placement.
JGr: The growth of direct lending away from the private equity-sponsored market and into non private equity-sponsored businesses.
JGh: ‘ESG’-related private debt funds.
TT: Innovative structures that enable new investors to access private credit. Most notable are the rated note structures tailored for insurance companies. The more diverse the investor base, the more accepted the asset class will be.
TA: Private debt evergreen or open-ended funds and accounts continue to be of growing interest to investors and advisors. I don’t necessarily think there is a single best fit solution as it will depend largely on GP strategy as well as LP preferences and constraints, but I expect more GPs and LPs will work to find new structures and vehicles that work for them.
Which investor group is most likely to increase its exposure?
JGr: Public and private pension funds.
JGh: Insurance companies globally. As we head back to the ‘near zero’ interest rate world, the search for yield will intensify.
KK: Insurance companies are most likely to increase their private debt exposure. The private debt product has always made sense for them. From a geographic perspective, Asian investors, in particular from Japan, have increasingly begun to adopt private debt strategies.
ND: This asset class has been attractive to pensions and insurance companies that can match their long-term liabilities with higher-yielding, stable asset classes. This offers them a liquidity and complexity premium against a backdrop of historically low yields. Increasingly family offices are showing interest in this asset class.
TT: As the credit cycle turns and high returning strategies like distressed see their opportunity set expand, investors across the board will allocate more to that specific strategy. Over the medium to long term, retail investors will also gain access and we see the early stages of this already taking root.
Where is the next greatest challenge going to come from?
ND: A macroeconomic slowdown that will test the portfolio construction of managers as well as the underlying loss of some of the newest debt instruments. For example, ‘traditional unitranche’, first loss/second loss unitranche or unitranche ranking behind super senior term loans and/or RCF.
JGh: Direct lending will face a challenging time as economies slow and funds face a credit cycle for the first time in a decade.
TT: Without question the credit cycle will challenge private credit funds. Many will not make it, which means manager selection is paramount. But the asset class as a whole will perform well in the next crisis. So, while the next crisis will challenge private credit, private credit will meet the challenge. More pernicious is the onslaught of competition, particularly from marginal players who act in haste.
KK: Due to the inherent multi-fund model of private credit managers, we believe that developing the appropriate infrastructure to support several funds will be a prevalent challenge for growing firms as they raise more capital.
What strategy or region is the rest of the market overlooking?
TT: I’d have to say Australia. It has excellent creditor rights, a muscular regulator and a historically robust economy. If you can manage the currency risk and the plane ride, it is worth a look.
JGh: India will probably see some of the biggest growth in the private credit space over the next five years, as the economy’s growth is crying out for capital and the banks and non-banking financial companies are paralysed.
KK: We believe the market is overlooking (or at least not as saturated for) lending strategies that are focused on more specialised industry segments, such as financial services or healthcare.
ND: Junior debt, as everybody seems to have focused on unitranche and raising bigger funds in that space. We believe significant risk-adjusted returns can be extracted here.
What is going to be the biggest change in private debt over the next three years?
TA: I wouldn’t attempt to make a call on the timing of it when it will happen, but I expect an economic pullback and increase in defaults will seriously test the business models of many GPs who are focused solely on direct lending.
JGr: Going through an increased default cycle will test managers and clarify relative performance.
KK: The increased importance of scale will drive smaller managers to consider selling to larger, more diversified platforms. M&A will continue to grow as the costs to compete for dealflow and to support the required infrastructure will make it challenging for these smaller managers.
TT: I believe the markets will be tested in the next three years (I concede I’ve been saying this for three years already!) and, to borrow Warren Buffett’s analogy, when that tide goes out, the naked swimmers will have to get out of the ocean.