Private credit in times of turmoil
In good times, the investment-grade private credit market has historically exhibited a variety of positive attributes for investors. For example, relative to more liquid public alternatives, it has offered the potential for a pricing premium, favorable asset/liability matching characteristics, credit-protective structural aspects, and incremental diversification.
But we think challenging times, perhaps counterintuitively, may offer even better opportunities for private credit. Take the global financial crisis (GFC) as an example. In 2008 – 2009, private credit demonstrated resilience in a very stressed economic environment as protective structures such as financial covenants required prepayment or price and term renegotiation if issuers were unable to stay within prescribed levels. Private credit also offered the potential for opportunistic investments during the GFC as new issuers found the flexible, negotiated, and bespoke nature of the asset class to be supportive and were willing to pay a premium to access financing.
This market resilience was illustrated again during the European banking crisis in 2010 – 2012 and, most recently, in 2020 – 2021 during the COVID-19 pandemic. In this latter case, issuance reached record levels and the market offered strong relative-value, highly negotiated credit protections (due to market dislocations), and access to public market and cross-border issuers at attractive spreads.
Given the potential for elevated volatility and a recession in 2023, we think private credit could once again offer incremental relative-value opportunities, in addition to its credit-protective attributes and diversification versus comparable public alternatives. Specifically, we expect investment-grade private credit to see incremental issuance opportunities and increased deal flow, fueling greater diversity in names, sectors, and geographies. In our view, this could provide investors with alpha-generating opportunities and attractive access across diversified public, private, and cross-border issuers at a premium.