ESG | LGPS Institutional Masterclass
1 week ago
Learning: UnstructuredLinda Desforges, Portfolio Manager, Credit, discusses the key drivers of the private credit markets, the challenges when selecting new managers and future opportunities.
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Mhm. Oh well, really, in recent years, the credit markets have changed quite considerably prior to the global financial crisis. It was really the banks that dominated the sector, I think back in 1994, you had the banks having around about 70% of the share of that market. And I guess host the global financial crisis. The regulators came in with that level of systemic risk was a concern. And the regulation, the new regulation made it quite onerous for banks to hold on to these assets and they step back from the market and and private credit managers came in and it really wasn't just regulation, it's private equity managers have also been more active and and grown considerably their presence in helping private companies grow. And private credit managers have grown sort of hand in hand with them. And private equity managers really value flexibility, responsiveness, a security of being able to get that loan quickly. Um So they've just been working together so, you know very well um and live in their market share. And it's been really a good environment for investors as well, because certainly as interest rates have come down being able to get yields in the order of the growth yields for these middle market loans are 7-9%, there's probably some fees that the equal way some of those returns, but even on a net level, a 6% return is very attractive compared to what you can get in the liquid, low market, which is um larger companies of 4.5% and then what corporate bonds, you know, less than 2% government gilts. Obviously they're really, they're just as shocking shock absorbers to the portfolio rather than delivering any income. So yeah, so it's been, you know, an exciting time for the private credit markets and, and all to the benefit of the best is really, mm. Yeah, there are some challenges. I mean it's the good thing about private credit is that there's lots of choice. I think over the past five years, they've been 253 New, um, launches a private credit funds. Sometimes it's add on strategies or sometimes your manager's coming into the market so there's lots of choice. But in that choice, you know, you can look at the track record, but you've got to be very careful because even when you look at say, just the senior loan space where they're very safe loans with lots of protection under these managers can take different approaches. They can lend to more cyclical companies. They can lend to companies that have overall higher indebtedness. Um, and they'll get better returns because of that. But they're taking on more risk and they know more challenging environment. It could be more challenging for them and the returns might not be there to really, we, as managers have to lift up that on it and really look at the portfolios go with a fine tooth comb, looking through what kind of risks have been taken. Um, and look at, you know, whether they have been rewarded appropriately. Look at the challenges that they've had and um, you know, how they've been able to, you know, meet those challenges. We really are keen on looking at managers that have got very strong platforms so well resourced with high caliber individuals. I know how to research industries and companies well resourced from a legal perspective, know how to write loan agreements and structure things with that. Downside protection managers have got good workout experience. So when things go wrong, they are able to develop their sleeves and put things right. We recently invested with a manager but they've been able to deliver positive returns from their distress loans that came through. It was quite unusual actually. First senior low managers to do that, but you know, they had a very good workout team and could either take ahold of the company and turn it around and get some equity upside while they were able to just recover their principal amount and they've been able to charge higher fees because it's been a more challenging environment. So those are the type of managers really that we want to invest with the good ones out there. Mm. Yeah. Well, I suppose it's interesting because I guess, you know, now with, I guess in the covid environment there's, there's probably more stresses that lie ahead of us, but we do want to be really careful. You know, this is from a portfolio construction perspective, we are focusing very much on the safer parts of the credit market. We want that for our investors really, um There will be some opportunities perhaps in their distressed specialist managers that focus on these areas. But the track record generally of these managers has been quite patchy because sometimes the opportunities are there and then they go away. So you need managers that can really be flexible and find other these strategies in other ways. You know, earning good returns from the money that's been committed to them by that investors. I think in the market though there will be some interesting opportunities in that very safe senior lending space and it's probably going to be the larger managers that really I've got the better opportunities and you've seen through the code experience that private equity firms. Yes, I don't want to have too large a book of lenders that they have to scramble to when they've got challenges with their companies. So they're starting to slim down their book of lenders. And it will be the larger managers that are able to write home loans that could mind really quite big tickets. They couldn't be responsible for leading the underwriting and structuring and really controlling the elements of you know, that that loan structuring and they can probably, you know, and better returns because about, and they should be able to deploy more capital and and have successful strategies. I think nearly I think there will be some very good opportunities in the european market because the european market is some way behind the U. S. Market. In terms of the penetration of private credit managers There. The banks have around about 40% market share compared to the us now where the banks really is. You know it's it's considerably less. I think about 14% of the market is still with the banks there so there's still room and we're seeing it now that post covid the banks are stepping back even further when the private credit managers are stepping in and you know being able to act as responsible lenders to the product equity funds into the private companies that don't even have that private equity backing. Yeah. Yeah.