Audax urges discipline in credit selection as competition intensifies
Increasing demand for private credit investments means that managers must remain disciplined when it comes to credit selection, Audax Private Debt’s managing directors have warned.
Earlier this year, a survey by Coller Capital found more than 90 per cent of investors expect to increase or maintain their allocations to private credit – a higher increase than any other alternative asset class.
However, a slowing in the leveraged buy-out market means that competition for new deals has increased, Audax noted.
According to Noiel Brill and Colleen Longobardi, managing directors at Audax Private Debt, managers should be even more prudent than usual in their underwriting in order to avoid portfolio volatility.
“With increased competition, ongoing inflationary pressures, and economic uncertainty, it’s critical to remain disciplined in credit selection,” said Brill and Longobardi.
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“Targeting non-cyclical industries with resilient demand drivers and borrowers with sufficient market share, niche offerings, critical expertise to facilitate pricing power, and ample free cash flow, are important credit characteristics to filter through an investment process.
“It’s important to maintain a strong credit discipline in structuring transactions for appropriate leverage, focused on cash flow at investment and through recession or rate scenarios.
“Managers with broad origination market coverage and capabilities drive the ability to remain highly selective with a keen focus on credit quality through stable and challenging markets to try to ensure a viable path to a successful exit.”
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They added that credit discipline can be strengthened by broad portfolio diversification at the underwriting level, and by minimising risk in periods of volatility, with the aim of maximising returns and preserving capital.
This includes building experienced teams with exposure to multiple economic cycles, coupled with a rigorous credit monitoring process which enables managers to spot emerging risks and opportunities.
“Maintaining a dialogue and reporting structure is critical,” they added.
“Supported by robust analytical tools and ongoing credit reviews, these disciplines support the goal of maximising positive outcomes.”
Despite these warnings, Brill and Longobardi agreed that while uncertainty remains around timing of interest and economic cycles, the opportunity in private debt remains robust.
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