LGT Capital Partners diversifies private credit strategy
LGT Capital Partners is allocating more of its private credit portfolio away from direct lending, as fierce competition brings down yields.
Thomas Kyriakoudis, partner and co-head of credit solutions at LGT Capital Partners, said that direct lending will remain its largest private credit allocation but the firm is now investing more in other areas.
“In 2023, it was the most attractive market for direct lending I’ve seen in my career – wide spreads and good yields,” he told Alternative Credit Investor.
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“But this year, particularly in the second quarter, there has been a lot of compression on those yields. I’d definitely identify that upper mid market – firms with more than £75m EBITDA – to be more competitive now.”
An influx of new entrants to the direct lending space, combined with the recovery of the broadly syndicated loan (BSL) market, has intensified competition for larger deals.
Deloitte data for the first quarter of 2024 showed that the BSL market recorded a total issuance of €29.3bn (£24.8bn) in Europe, the highest level since the second quarter of 2021.
As a result, private credit firms are looking elsewhere for yield.
Kyriakoudis noted “more resilience in spread compression” in the lower mid-market as private credit firms are not competing for deals with banks.
“We want to be balanced,” he added. “There’s a minimum size for us, we wouldn’t go for the smaller companies but there’s a band of interest below those deals that would compete with the BSL market.”
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Other areas that the alternative asset manager finds attractive include net asset value lending, asset-backed lending, significant risk transfers, structured credit such as CLOs, mezzanine finance and CLO equities.
“I think [asset-backed lending] has the potential to be bigger than direct lending in terms of the absolute size of the market,” said Kyriakoudis. “It’s potentially a very interesting area. The market has many of the same dynamics as it did post-GFC, when you saw banks be less aggressive, so there are opportunities for private lenders to come and deploy capital.”
LGT Capital Partners manages over $5bn (£3.8bn) of private credit assets, on behalf of the LGT endowment and external clients.
