Despite declining market conditions, the business of private credit isn’t slowing down — at least for the largest asset managers.
“When the public markets are volatile like they are today, you’re seeing accelerated market share gains,” said Christina Lee, managing director at Oaktree Capital Management, speaking on a panel at the SALT conference in New York on Monday. “Borrowers are just getting more comfortable with private lenders. They see an ease of execution with it. LPs are more interested in the asset class.”
Lee added that yields in private credit are still higher than in the public markets. Private credit boomed after regulations put in place after the global financial crisis, which made it more difficult for the big banks to hold riskier loans. Asset management strategies have continued to grow through the private capital fundraising boom in recent years.
Phil Tseng, global credit managing director at BlackRock, who also spoke on the panel, said the strategy is proving itself. “Private credit is now seen and has performed through multiple cycles,” Tseng said. “It’s become a much more mainstream and adopted asset class.”
Today’s economic environment has benefitted the strategy in some ways. “Our debt is issued as floating rate debt, so there’s a natural hedge against rising interest rates,” Lee added.
But Nicole Drapkin, managing director at Blue Owl Capital, sees the headwinds as a “double-edged sword.” In some sectors, deals have started to slow down, particularly sponsor-backed mergers and acquisitions.
She noted that Blue Owl sees high-quality opportunities to be lenders in deals in the technology and software industries, but those are fewer in number than they were previously. Take-private deals, in which a publicly-held company is purchased by a private equity firm or privately-held company, remain hot and are getting financed in the direct lending markets.
“Even though you’re seeing a slower deal volume, you’re seeing better deals,” Drapkin said.
BlackRock’s current holdings have also provided opportunities to put money to work. “The environment for deployment is actually quite rich right now, but a lot of it is coming from our existing portfolios,” Tseng said.
Outside of that, BlackRock has been sticking to “non-cyclical” firms that can “weather shocks.” These include primarily service-oriented businesses with high visibility and revenues, like healthcare, technology, and industrial services providers. Drapkin, too, believes technology and software providers are attractive deal candidates.
Tseng added that poor company management always presents deal opportunities.
“Bad management is not cyclical,” Tseng said. “That happens across industries time and time again. It may not be a full tailwind of opportunities, but there’s always a steady supply.”
Asset managers are still determining their next steps.
“I will say I think a lot of us are in price discovery mode and waiting to see what happens in the next six months,” Lee said. “We’ll never sit out of the market. It’s more, what’s good for us?”