DWS’ Kelly favours senior, unlevered debt as competition heats up
In a world with constant uncertainty private credit remains highly prized, according to Paul Kelly, global head of alternatives at German asset manager DWS. But positioning is now more important than ever.
In a letter to investors, Kelly warned that with the asset class growing rapidly, and increasing competition, it is important to choose the right managers.
“Surplus cash flow, stronger claims to the underlying assets (senior positioning), comprehensive lender protections, and reduced interest rate sensitivity evidenced by near-zero interest rate duration can all offer important insulation from volatility and loss,” he noted.
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But although he sees compelling value in direct lending, his most positive view is on senior loans that are unlevered, geographically diversified and from managers that have multiple origination channels.
Those who have “direct connectivity to lower mid-market borrowers, are best positioned to deliver value for investors”, he said.
Meanwhile, market conditions are creating an interesting opportunity for real estate debt, in his view. With lenders pulling back due to higher rates and more than $2tn (£1.6tn) in US commercial real estate loans set to mature before 2028, private capital can fill the refinancing gap that’s been created.
“In real estate, we believe the logistics and residential sectors still offer the most attractive risk-adjusted returns for both senior and junior debt, although offices and retail could also offer interesting lending opportunities on a more selective basis,” he wrote.
Read more: More distress for real estate debt could be on the horizon
He added that the alternatives team dislikes synthetic methods to deliver returns – such as high leverage – as “this is not the moment to amplify risk exposure”.
“Instead, we favor idiosyncratic credit where the borrower has an identifiable need to pay a complexity or customization premia – an opportunity set that continues to grow under more volatile capital allocation conditions,” he noted.
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