Topic Tags: Alternative Credit

Private Credit: Consistency is Key

We are all familiar with adages like “consistency is the key to success” and “excellence is mundane”. For private credit, consistent returns achieved in a straightforward way bring these statements to life. Recent data1 has shown that from 2004 to 2021, U.S. private credit has generated positive or flat performance throughout the economic cycle – from expansion, to late cycle cooling, through a recession and into a turnaround. The same cannot be said for U.S. high yield and leveraged loans, which have historically contracted during recessionary periods. Private credit has outperformed both high yield and leveraged loans during expansionary and late cycle stages, only underperforming in the turnaround phase when the ISM Manufacturing Index is less than 50 and rising. The straightforward, perhaps ordinary nature of these loans, loans to businesses from non-bank lenders, makes the asset class even more interesting in our opinion. Marquette advocates allocating to private credit in order to capture two premiums – yield premium and structure premium – which are especially compelling in today’s low interest rate environment. Moreover, the data shown in the chart above gives quantifiable evidence that the asset class is also a solid diversifier to a traditional fixed income allocation. We continue to find attractive managers and strategies in the market for investors who already have a dedicated private credit allocation and would be happy to further discuss with others interested in the space.

1https://am.jpmorgan.com/content/dam/jpm-am-aem/global/en/insights/market-insights/guide-to-alternatives/mi-guide-to-alternatives.pdf

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

When Will the SOFRing End?

Global authorities such as the SEC, Federal Reserve, European Commission and European Central Bank are currently transitioning the market’s use of LIBOR as a base rate for floating-rate securities such as bank loans, CLOs and private credit towards the use of the current front runner as a replacement: SOFR, which stands for the Secured Overnight Financing Rate.

This newsletter explains what a base rate is and how it is used in investing, why LIBOR is being transitioned to SOFR and the key differences between the two, and when the change is expected to take effect.

Read > When Will the SOFRing End?

For more coverage on LIBOR, please see our Bank Loans Position Paper and recent Chart of the Week, The Sixth Fed Hike and Rising LIBOR.

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

The Evolution of Private Credit

With roughly $48B of U.S. private credit fundraising taking place in 2018 ­­— surpassing 2008 levels of $42B — private credit has established itself as an up-and-coming leader within the alternative space. By 2023, private credit is estimated to reach $1.4T in AUM, becoming the 3rd largest alternative asset class. This kind of success has brought with it increased competition, robust inflows, rising pools of dry powder and an inflow of managers within the space, up from 31 managers in 2010 to more than 130 in 2018.

The growth of available capital in the private credit market has been substantial, but the growing demand for debt has kept the opportunity largely intact. Direct lending, which is more prevalent in the middle-market, has rapidly developed into a meaningful source of debt capital within the private equity (“PE”) ecosystem.

Since the global financial crisis, the leveraged loan market has become less accessible to middle-market companies as banks have generally stopped lending in this part of the market. The volume of leveraged loans held by banks reached roughly 30% in 2008 and has since declined sharply to less than 10% today. Coupled with a 48% drop in the total number of U.S. banks from 1998 to 2018, demand for direct lending has increased as U.S. banks have substantially withdrawn from the market.

In their relentless search for yield, institutional investors stepped up in a meaningful way vis-à-vis direct lenders, and while highly competitive right now, direct lending brings PE-style returns with heightened levels of downside protection. Because private credit investments can be approached in a defensive, risk-controlled way, private credit is especially well suited for late-cycle conditions, and with its higher coupons, robust cash flows, and lower risk profile, we can expect private credit to continue to grow at an accelerated pace and become a consistent component of an increasing number of institutional investors’ portfolios.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Supercharged Fixed Income: Direct Lending

October 2016

Direct lending is an established asset class that provides a total return to investors typically between that of high yield bonds and mezzanine debt. It is considered private credit because the assets in a direct lending portfolio are loans originated privately between the direct lending fund manager (acting as lender) and the borrowing company. Due to the private nature of direct lending, the asset class produces attractive risk-adjusted returns supported by reduced competition, lower volatility, and favorable negotiation leverage for the direct lender. Since the financial crisis of 2008, direct lending as an asset class has featured unprecedented growth in deal volume as well as assets under management. This growth is attributed largely to post-crisis regulations that effectively forced banks, the traditional direct lenders of the past, to shed their direct lending operations. Non-bank direct lending asset managers have in turn benefitted from the significant rise in direct lending opportunities.

Read > Supercharged Fixed Income: Direct Lending