Finding Equilibrium in Public and Private Credit

Credit markets have been in flux for the last two years, but the path forward for the asset class is becoming a little clearer. We see a trend in which private credit is becoming a more permanent allocation for investors, and we believe that flexibility and certainty of execution will continue to be attractive for borrowers even after syndicated markets reopen. We see senior secured direct lending becoming an anchor allocation within private credit given the attractive income available, supplemented by either opportunistic, higher-yielding strategies, such as capital solutions and junior debt, or strategies that are complementary by being less correlated to traditional, developed market corporate macro risk, such as asset-based finance or Asia credit strategies.

However, we think the permanence of private credit does nothing to diminish the need for public credit markets. Both have a place in a healthy, functioning borrowing system and can serve different purposes. Public credit allows for quick deployment, and the relatively high yields currently available in public markets have the potential to cushion against price volatility. The liquidity of public markets creates the potential to shift quickly when market conditions change. As capital markets reopen, we think the change in the investment environment is likely to be both significant and swift. We believe this vintage of new deals will be attractive and that taking advantage of new issuance across private credit and public credit will lead to differentiated outcomes, particularly if lenders are able to expand the new issue premium with call protection or call premiums. This is most evident in high yield bonds, private junior debt, and other subordinated capital solutions. In short, we think it remains a good time to be a lender.

As for the capital markets and overall environment, we see some green shoots emerging. U.S. IPO activity has ticked up. Our debt capital markets team has seen a ramp-up in syndicated public debt markets and expects this trend to continue in the remaining months of 2023, and we have noticed that our clients have more appetite for allocating to credit in both liquid and private markets. We think that the interest rate outlook is a tad bit clearer, and that while credit fundamentals have not yet bottomed, they may be closer to doing so. Though there will no doubt be bumps in the road from here, we note that at this point in the calendar, there is pressure to get invested and to do deals. Fear of missing out is a powerful motivator.

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