AIMA’s latest meeting of its Global Investor Board (GIB) convened to examine a timely and closely debated question: “How real is the risk in private credit”?

The flight to redemption amongst retail and wealth clients from semi-liquid vehicles has drawn considerable attention. Against this backdrop, the discussion sought to understand how institutional allocators are viewing the sector. In short, their level of concern is notably lower than the media noise suggests. 

AIMA’s head of private credit opened the discussion with a short presentation outlining key insights from their research. The conclusions of this research suggest:

• While metrics indicate increased portfolio stress it is still within historical norms.
• Where stress exists, it is concentrated rather than widespread.
• PIK- related stress is minimal. Usage indicates flexibility rather than distress.
• Severe stress-test scenarios imply returns should still outperform other private market strategies.

To further inform the discussion, a poll of the GIB was conducted ahead of the meeting. The responses provided useful context on the current investor sentiment:

• 73% are not at all or only slightly concerned about headline risk.
• 87% are slightly or moderately concerned about default cycle over next 5 years.
• 88% expect returns to be in 7-9% range over next 5 years.
• Only 15% expect AI disruption in PC whereas 38% expect it in PE.
• 62% expect structuring discipline and documentation to be primary driver of outperformance next 5 years.

The ensuing discussion amongst those on the call revealed consensus that the negative public narrative is generally over-exaggerated.

• There is recognition that some deterioration in performance is underway and there are some pockets of distress.
• However, there is no sense of panic or systemic risk that is being hyped in the media.
• Much of the noise centres on software companies exposure which suggests more of an issue for PE than PC.
• Thoughts are being given to the opportunities any dislocation might present:  including in secondaries, distressed/opportunistic strategies, and public BDCs at discount
• Late credit cycle mentality leading private credit managers to focus on tight documentation and protections rather than origination and deployment volumes.
• Trustees are inevitably asking more questions given the public narrative.

In recent weeks AIMA colleagues have heard from other LPs as well as investment consultants which support the views expressed by the GIB on the call:

• Current developments are seen as a typical market correction at this late stage of the credit cycle, and some areas of stress are to be expected.
• Long-term confidence in PC remains and allocators are already seeking opportunities from dislocation/over-correction.
• Concern is greater around PE, particularly regarding valuations, liquidity and exits.
• Fundraising has slowed in PE and VC.
• Retail and wealth investors need more education on realities of semi-liquid products.

To read more about the work of AIMA’s GIB and previous discussions, please go here.