Displaying items by tag: private credit

Over the next few years, it’s expected that alternative assets will become a larger part of client portfolios. Advisors will have to contend with a changing landscape especially as more products will be introduced that are more complicated in terms of taxes and reporting. 

A looming challenge for advisors will be handling the increased workload as well as understanding these products in a comprehensive manner in order to explain it to their clients. It’s likely that asset managers will form partnerships with RIAs in order to help them navigate and simplify the process. Already, some asset managers have started to invest in efforts to educate advisors, but more will be necessary given the increase in the number of options.

According to Ernst & Young America's Financial Services, some advisors will increase allocation to alternatives to 10% or more. In the near-term, private credit products will see the strongest growth as they are seen as less risky while offering higher yields than fixed income.

In addition to private credit, most exposure to alternatives currently is through liquid alt mutual funds, liquid alt ETFs, and publicly-traded REITs. Over the next couple of years, areas forecast to have the highest growth in terms of assets are cryptocurrencies, digital assets, hedge funds, private equity, and private debt. 

Finsum: The alternative assets space is expected to heat up in the coming years. One challenge for advisors will be to understand these products and handling an increased workload. 

Alternative investments have captured the attention of institutional investors for decades, with private equity making up the lion's share of the alts category. Today, however, private credit is making waves and grabbing its piece of the investment pie.

As recently noted by Institutional Investor, "private credit has arguably become the most powerful transformational force in the financial world since the 2008 economic crisis." This rise to prominence can be attributed to a confluence of factors. Traditional lenders, reeling from the recent banking crisis, have become more risk-averse, leaving a gap in credit availability. Stepping into this void are alternative investment managers, offering much-needed capital to businesses.

With some investment managers now packaging their private credit holdings into vehicles accessible through financial advisors, an entirely new world of opportunity has opened to individual investors, allowing them to diversify their portfolios with this exciting asset class.

Private credit presents a compelling option for advisors seeking to enhance portfolio diversification and reduce correlation. While the credit crunch of early 2023 has eased, private credit firms remain active, diligently finding new markets to deploy their capital. If this trend continues, it ensures a steady supply of investment opportunities for both institutional and individual investors.

Finsum: Learn how the surge in private credit is creating portfolio diversification options for both institutional and individual investors.

JPMorgan is looking for a partner to accelerate its push into private credit. Some current prospective partners include sovereign wealth funds, pension funds, endowments, and alternative asset managers, although it’s possible that the bank may ultimately go with multiple partners. 

Reportedly, the bank is looking to add to the $10 billion it’s already set aside for its private credit strategy. It believes that this additional capital will enable it to compete with other names more effectively in the space such as Blackstone, Apollo Global, and Ares as it would be able to make bigger deals. Additionally, there would be less balance sheet risk as the bank would originate the deals with its outside partner, providing the capital. In theory, this would allow for more scale to grow private credit revenue without additional risk. 

Due to banks dealing with an inverted yield curve and high rates, private credit has been taking market share away from other sources of capital like leveraged loans and high-yield bonds. Already, many of JPMorgan’s competitors like Barclays, Wells Fargo, and Deutsche Bank have launched their own efforts to build a presence in the private credit market, although each has its own strategy.

Finsum: JPMorgan, like many Wall Street banks, is looking to increase its presence in the private credit market. It’s currently in discussions with prospective partners to provide outside capital.

Based on research conducted by PGIM’s David Blanchett, Head of Retirement Research, and Sara Shean, the Global Head of Defined Contribution, there is a strong case that private real estate debt can be an effective source of diversification for fixed income portfolios, while also modestly boosting returns. It’s of increasing salience given that fixed income portfolios are once again a meaningful source of income for investors.

Blanchett and Shean conducted an analysis of various asset classes to determine how they would have improved the return and risk profile of a fixed income portfolio. They used the Bloomberg US Aggregate Bond Index as their benchmark. In addition to this benchmark and real estate debt, they also included emerging market debt, commercial mortgage-backed securities, leveraged loans, and high-yield bonds.

Interestingly, the benchmark had an annual return of 4% with a standard deviation of 4%. In contrast, private real estate debt had an annualized return of 6% with a similar standard deviation. The analysis also gives insight into the optimal weights of various asset classes in terms of impacting the efficiency of a bond portfolio. The biggest takeaway is that allocations to real estate debt led to a positive impact on risk and expected returns, leading to a higher risk-adjusted performance. 

Finsum: Research conducted by PGIM shows that private real estate debt can boost the risk and return profile of fixed income portfolios.

Companies with large amounts of debt approaching maturity are tapping the private credit industry for financing that may not be available through public markets. The latest example is PetVet, a veterinary hospital operator owned by KKR, which is looking to refinance more than $3 billion in loans. Other recent examples of companies include Hyland Software, Finastra, Cole Haan, and Tecomet which have raised a cumulative amount of $10 billion in the past few months. 

With private credit, companies are able to bypass traditional banks and access billions in loans. This is being facilitated by a surge of inflows into the asset class which is leading to funding for takeovers and to refinance debt. 

Another factor supporting the growth of private credit has been weakness in the syndicated loan market, where banks arrange financing and then sell the loans to other investors. Given that over the next 3 years, $350 billion of leveraged loans are set to mature, private credit will continue to be a necessary intermediary especially for companies with higher debt loads.   

Typically, private credit investors earn between 5 and 7% above benchmark rates which comes in at between 10.5% and 12.5%. In contrast, the average yield on B rated corporate bonds is 9.2%. 

Finsum: Private credit is playing an increasingly important role when it comes to providing financing for companies. Here are some of the major factors behind this shift.