AllianceBernstein: Investors need to ‘widen opportunity set’
Private credit investors need to “widen the opportunity set” amid tightening spreads and market uncertainty, according to AllianceBernstein’s head of private alternatives.
In an article, Matthew Bass noted increased competition from banks for corporate loans due to the return of the broadly syndicated loan market, but said that the structural forces that have driven the rapid growth of private credit in recent years, including stricter banking rules, remain in place.
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He highlighted opportunities in core middle market direct lending, where he said covenant protections are typically strong, but also underlined the case for diversifying into other areas of private credit.
“Direct lending to middle-market companies checks in at about $1.5tn (£1.2tn) today, according to Preqin, and is on track to exceed $2tn by 2027,” he said.
“And at $6.3tn and growing, the consumer-oriented asset-based finance market is many times larger and provides financing for residential and commercial property, cars, credit cards, small business loans and other types of credit that grease the gears of the real economy.
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“We think both belong in a diversified portfolio. Judging by their strategic asset allocations, investors agree. Private assets in general have been among the fastest growing components of allocations over the past decade. Why? We believe it’s because investors see the value in thoughtfully incorporating these less-liquid assets into their allocations to increase return potential, particularly relative to public credit.”
Bass conceded that for many investors, “corporate credit will remain the linchpin of their private credit allocations”. While spreads have narrowed, the base rates used to price private corporate loans are likely to stay above their long-term averages, he added.
But he also explained that “it’s important that investors widen the opportunity set” in current market conditions.
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This could include asset-based finance, funding the energy transition and potential opportunities in the distressed real estate market.
“In the years ahead, we think generating the returns necessary to stay ahead of inflation will become more challenging,” Bass said. “We believe that will raise the value of the illiquidity premium associated with many forms of private credit and the inflation hedge that many floating-rate structures provide.
“We expect competition in the private capital markets to persist in the second half of 2024. But we believe that private credit’s increasingly central role as a financier of today’s economy will continue to expand. For investors, that may provide opportunities to diversify their asset allocations and increase exposure to the real economy.”
