Displaying items by tag: private credit

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. 

Many investors are hopeful that inflation will continue moving lower which will provide relief for fixed income and equities as the Fed could start loosening monetary policy. However, KKR does not believe it’s likely. Instead, they believe we are in the midst of a ‘regime change’ in terms of the macroeconomic landscape which will require investors to adopt new portfolio management strategies.

In essence, they see inflation being structurally higher due to factors such as entrenched fiscal deficits, labor shortages, energy transitions, and increased geopolitical risk. With these conditions, stocks and bonds are more correlated as evidenced by the last 2 years. The firm believes that investors need to increase their allocation to real assets with recurring yields as a source of diversification, given the increase in bond market volatility. 

Rather than the traditional real assets such as REITs, TIPs, and precious metals, they find value in real assets that have collateral-based cash flows like private real estate to provide positive returns while dampening portfolio risk. 

Even if their outlook on inflation proves to be incorrect, KKR believes that real assets should outperform given that they remain bullish on economic growth and see Q4 and 2024 GDP coming in above expectations. 

Finsum: KKR is bullish on real assets including private real estate as it believes inflation is going to remain structurally high and that bonds are not providing sufficient diversification.

A combination of factors has led to the worst housing affordability in decades. During the pandemic, there was a surge in real estate prices as many moved out of urban locations to the suburbs due to the rise of remote and hybrid work arrangements. 

This increase in demand also coincided with a tight supply-demand dynamic as new home construction has lagged population growth ever since the Great Recession and subprime mortgage crisis. Another factor supporting demand is that Millennials are entering their peak consumption years in their 30s and 40s. 

Additionally, after more than a decade of low rates, current monetary policy is at its most restrictive in decades. Thus, mortgage rates are now hovering above 7%, while they were at 3% for most of 2020. 

According to Andy Walden, the VP of enterprise research for ICE Mortgage Technology, household incomes will have to increase by 55%, home prices decline by 35% with mortgage rates back to 3%, for affordability to revert back to historical norms, or some combination of these factors. 

Of course, such dramatic developments are unlikely. Walden believes that inventories are a key leading indicator for home prices. In recent months, there has been a modest bump in listings, but nothing significant enough to affect affordability. 

Finsum: A combination of factors has led to housing becoming unaffordable for many prospective buyers, creating a major challenge for the real estate market.