Like private equity, private debt is traded less often than its public counterpart. This lack of day-to-day pricing can be a good thing for investors seeking stability, but it can also be detrimental for those looking for immediate returns.
Because the public markets have taken a hit in the first half of 2022, spreads in public bonds have been wider than those in private credit. According to Steven Oh, global head of credit and fixed income at PineBridge Investments, the sluggish spreads in private credit have become “a question mark” for investors with a short investment horizon.
“One of the things that has played out with respect to private credit is that, on the positive side, it’s a steady asset class,” Oh said at a roundtable on Tuesday. “But at the same time, public spreads have widened in the [past] six weeks or so. In private credit, [yields] have been very steady.”
As the fear of recession looms and economic health deteriorates, public bonds have responded with higher yields over risk-free benchmarks. The high-yield bond spread, which measures the borrowing costs for risky companies, rose to over 4.8 percent in the last week of May, according to Fed data. Oh said that this means the spread premium for private credit assets has been “truncated.”
“When you think about any asset class, you’re taking [an] incremental risk of some nature,” he explained. “With private credit, you’re taking a small-company premium and an illiquidity premium.”
Oh added that for investors who are able to freely navigate between public and private debt, “the equation [over the last year] has tilted from generally a much more favorable environment for private credit [to one that’s] somewhat less favorable today.”
But Oh said that private credit is still an attractive investment for those with a long-term horizon. For one thing, private credit is a floating-rate instrument, which helps protect investors from rising interest rates. It’s an asset class that can potentially benefit investors throughout the whole rate-hiking cycle.
In addition, the fact that private credit assets are not marked to market every day can be attractive to some investors. Oh said that during prolonged periods of volatility, “having [an asset] that doesn’t show any volatility [can be a good thing].” Although some public market managers have complained that the lower volatility commonly seen with private assets is nothing but a mirage, Oh said that it “actually has a positive value.”
He added that private credit investors will achieve better results if they can get the premium over a longer time period. “But certainly, in the very near term, the value proposition [for private credit] has waned a little bit overall.”