What role can private debt play within a client’s broader portfolio?
So we think investors are increasingly focusing on the private debt market for a number of reasons. The first is diversification. It gives them exposure to underlying corporate credit exposures. And they can create customized portfolios based on the diversification that they seek. The second is yield premium. One of the benefits of private debt market is premiums relative to what you can achieve in broadly syndicated or traded markets, both across corporate credit and across the fixed income alternatives.
Third is, at the end of the day, based on some changes structurally in the traded credit markets, there's opportunity in private markets. That's largely a function of the ability to continue to negotiate for covenant protections, negotiate credit documentation for purposes and the private market that have largely disappeared in the public market.
So, in situations where you're concerned about cyclicality or potential capital impairment, you can get to the table. And for the last, I think that benefit with the higher yield is allowing investors to increasingly focus on private debt.
What trends are driving investors to allocate to private debt as a distinct asset class?
There's a number of factors that are driving what I would say is an expansion of the opportunity set, you know, the broadest level of supply, demand imbalances are being created as banks have pulled back as capital formation in the private market has grown. and I would say has increased competition has picked up a lot of the opportunity set to deploy capital in the private debt markets has increased.
It's gone from just corporate lending. It's expanded into asset-based finance. It's moved into other areas, which is effectively capital replacement within the financial institution market. A lot of what is captured in what was called SRTs or significant risk transfers. I think the other an opportunity that's creating a driver of demand for investment opportunity is concerns over inflationary pressures.
We're concerned about companies that are negatively impacted by inflation. you can structure around that. If you're looking to get yourself exposed to companies that benefit from an inflationary environment. you can get long those assets. So I think there's ways to capitalize uncertainties, in private markets that you can't in public markets.
What should clients be asking their private debt investment partners?
The starting question has to be, are you buying into other people's transactions or you're leading in structuring and providing exposures that can't be found elsewhere?
The market is competitive, and you have to basically be able to discern whether or not you have a competitive advantage from either a sourcing or underwriting perspective, relative to the alternatives in the market. I think the second is, if you're truly being opportunistic, what does that mean? Sometimes the public markets present more compelling opportunities in the private market and vice versa.
So having a strategy that can pivot across both and that can have the conversation directed towards why did you deploy capital into a secondary market exposure versus focusing on a primary financing - I think that's very important.
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