AIMA Global Investor Board: Private Credit Summary Highlights
Published: 28 February 2024
- Market sentiment: Interest in private credit remains strong, with many investors maintaining or increasing their allocations to the asset class. From a tactical perspective, the case remains strong due to bank retrenchment, continued regional bank fears and ability for managers to negotiate stricter covenants.
- Strategies of interest: While senior secured and direct lending are still popular strategies, interest in NAV lending, ABS, infrastructure, green energy transition finance and other niche strategies is growing.
- Liquidity & lock-ups: While commitment timeframes have lengthened by several years, investors generally have few liquidity concerns and are comfortable with the longer lock-ups.
- Returns & leverage: Managers have thus far been able to generate satisfactory returns with little or no fund leverage, with the expectation of 8-12% return with minimal use of leverage. The use of IRR is still widespread across the industry.
- Potential concerns: Spread tightening, competition for deal flow and capital deployment are all being watched closely, as investors seeing a lot of refinancing – ‘extend and pretend’- to avoid forcing bankruptcies or restructuring, though managers are encouraged to protect assets where needed.
- Advice for managers: Manager and loan-level transparency, strong ongoing monitoring, proven in-house restructuring capabilities (especially with 2008 experience or similar), independent third-party valuation, sustainability considerations, stress testing and contingency plans for a potential default cycle are paramount.