Pimco says private credit is overvalued amid rising risks

Private debt returns are not aligned with growing levels of risk, according to Pacific Investment Management Co.’s chief investment officer for core strategies.

Mohit Mittal told Bloomberg that “fundamentals are deteriorating in more levered portions of the credit markets…You’re seeing more complacency, so you have to be very thoughtful – you have to be very careful.”

The private credit sector is facing increased competition since the broadly syndicated loan market has recovered, which is putting pressure on rates.

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“There needs to be compensation well north of 200 basis points in going from public credit into private credit, and we don’t see that in the current market,” Mittal said in the latest Bloomberg Intelligence Credit Edge podcast, referring to high-yield debt.

Mittal said that the current excess premium for less-liquid levered investments is about 190 basis points on average. In investment-grade credit, private markets pay about a 50 basis points spread over public, half the 100 basis points return he thinks they should offer.

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“The opportunity cost of going from public fixed income into private has gone up as yields have moved higher in the last two or three years,” he added. “That’s one of the reasons for our strong preference for high-quality public fixed income relative to private.”

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