Private credit valuations “appropriately priced”
Private credit valuations are “appropriately priced”, stakeholders have said, despite incoming regulatory scrutiny.
The industry has hit back at fears that the private credit market is overvalued, amid a flush of new retail investor money into the sector.
According to Preqin, the private credit sector is worth $1.7tn (£1.33tn), but JPMorgan recently suggested that the true value could be closer to $3tn.
Private credit funds have seen an influx of high-net-worth individuals (HNWIs) over the past year, drawing the attention of regulators on both sides of the Atlantic who have called for more transparency in the valuation processes.
However, Tim Warrick, head of alternative credit at Principal Asset Management, has said that private credit “is appropriately priced, and there’s a premium in the private credit market compared to the public market” despite tighter credit spreads.
“On the deals we’re seeing, we’re still seeing considerable value,” Warrick said. “We still think there’s strong value when you consider not only valuations, but consider the structure with covenants on the deals we’re looking at anyway, and lower leverage, which I think is maybe the most important thing in this consideration of risk-adjusted returns of valuation.”
Laura Erwin, executive director, private asset valuations at S&P Global Market Intelligence, agreed, noting that private credit valuations are typically carried out by third parties such as ratings agencies, which apply rigorous analysis to each deal.
“Private credit valuations that are performed in accordance with industry best practices will appropriately value the positions in light of prevalent market conditions,” said Erwin.
“We hence encourage adoption of these valuation frameworks across the private markets industry to help ensure the reliability of private credit valuations.”
The Financial Conduct Authority (FCA) has signalled that it will pay closer attention to private credit valuations in the future, as more and more HNWIs enter the space.
In a ‘Dear CEO’ letter sent earlier this year, the FCA confirmed that it will be conducting a multi-firm review examining valuation practices for private assets. This will include “examining the personal accountabilities for valuation practices in firms, governance of valuation committees, the information reported to boards about valuations and the oversight by relevant boards of those practices”.
