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James Keenan on the global rise of private credit

James Keenan |Aug 24, 2016

Investors need income just as much as they always have. But with government bond yields near record lows and likely to remain compressed for some time to come, sourcing that income is a major challenge.

Many investors are turning to private credit strategies to help meet their income needs. They have a number of options, including middle-market loans, real estate debt and infrastructure debt. They also have a deeper opportunity set than existed ten years ago, thanks to regulatory change that has reined in banks but hasn’t diminished the hunger for capital in these sectors. Yet these asset classes are also competitive and rapidly evolving. As investors seek to tap the illiquidity and complexity premiums potentially available, they need a clear view of each sector, and how it aligns with their specific needs.

To that end, we have created this collection of private credit briefings—Q&As with BlackRock portfolio managers focused on the various sectors. We begin the series with an overview from James Keenan, BlackRock’s Global Head of Fundamental Credit, who discusses the rise of private credit in the context of the credit market as a whole. For links to other briefings, see the box at right.

What’s driving the rise of private credit, and how does it relate to the broader credit market?

For a long time, investors could achieve their return targets by owning a traditional 60/40 portfolio, with the fixed income portion concentrated in government debt and investment-grade corporate bonds. But the era of ultralow interest rates changed that. Low rates on government bonds have led many investors to increase their overall allocations to credit, which has been a major driver of the huge growth in the leveraged credit and investment grade markets in the post-crisis years.

The rise of private credit, which has been growing even more dramatically, is another reflection of the new realities of the low-rate landscape. However, with private credit there is an additional driver: bank deleveraging in response to new regulations such as Basel III, Dodd-Frank and the Volcker rule. With banks providing less capital to middle market companies and infrastructure and real estate projects it became possible for institutional investors to participate in these sectors in a more meaningful way. So while investors today have to contend with paltry yields on government debt, they now have an expanded toolkit to help them meet their broad return objectives.

James Keenan
Managing Director, Global Head of Fundamental Credit
James E. Keenan, CFA, Managing Director, is Global Head of Fundamental Credit, Head of Americas Fundamental Credit, and a member of Americas Fixed Income within Alpha ...
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