-
""

Chasing yield in private credit markets

06 September 2021

By Jai Lakhani, CFA, London UK, Investment Strategist

You’ll find a short briefing below. To read the full article, please select the ‘full article’ tab.

  • Summary
    • With government bond yields so low and opportunities harder to find in traditional corporate debt markets, it may be time to consider private credit markets
    • After banks scaled back lending to smaller and medium-sized businesses following the global financial crisis, the private debt market is a more important source of finance for companies looking to grow quickly
    • Private credit markets can offer high returns, as well as helping to diversify your portfolio away from traditional asset classes
    • Despite the attractiveness of private debt, there are risks that need to be understood – and it makes sense to get expert advice to navigate the complexities of the market.
  • Full article

    With yields on government bonds anchored to ultra-low levels, is it time to consider investing in private credit markets to obtain higher yield along with less risky returns?

    Investors face a predicament when it comes to sourcing high-quality companies that offer an attractive return profile in traditional credit markets, which is an asset class that remains an important component in a diversified portfolio.

    Lower for longer interest rates are keeping government yields anchored (albeit with spikes in volatility) and the search for yield is driving down spreads on both investment grade and high yield credit (see chart).

    Attractive opportunities

    Despite the volatility and change in market sentiment in public credit markets, there remain attractive opportunities. First, the reopening of economies, as they continue to emerge from the pandemic and global growth should boost corporate revenues. Second, in the first half of this year, default volumes fell to their lowest levels in decades which could be viewed as justifying tighter spreads.

    It’s also worth pointing out that there is still carry to be had in both investment grade and high yield debt, especially when evaluated against government bonds. However, the importance of active management and selection remains paramount.

    This is particularly relevant given bank lending and merger and acquisition (M&A) volumes. Throughout the past two decades, and even more so after the financial crisis, banks have reduced lending to small and medium-sized enterprises. Even with sentiment anticipating a significant recovery, M&A activity has leaned towards large institutional borrowers who have previously accessed capital markets.

    Default levels suggest spreads may be overvalued

    Consequently, corporates in traditional debt markets may be over-levered. Although default volumes may not reflect this, spreads are arguably rich in light of this. Back in April, we discussed this risk in terms of analysing credit cycles in the 19 April Markets Weekly podcast.

    It therefore makes sense for investors to consider other avenues of accessing credit, where they can lend to high-quality businesses and earn returns that adequately compensate the risks taken. There is increasing evidence to suggest that accessing the private credit market is an attractive and complementary solution.

    Obtaining more stable balance sheets

    Many smaller businesses or entrepreneurs unable to access credit the traditional way may have much more stable balance sheets without being highly levered. What these organisations require is more specific lending to unlock their growth potential.

    As a result, the concern for these companies is more around the certainty of execution as opposed to the cost. Therefore, private credit managers that select the right firms and arrange bespoke solutions are likely to be rewarded with noticeably higher yields for the same given level of risk in public markets.

    These returns (see chart) might outweigh the risks of investing in private markets. Such risks include the illiquidity premium, the idiosyncratic risk given the more firm-specific solutions provided and the “backstop” risk as a result of private managers not being protected to the same extent as banks are by policymakers.

    Complementary solutions

    Ultimately, investing in private credit can provide a complementary solution to traditional credit markets, and achieve a higher return and diversify portfolios. However, manager selection is undoubtedly a key pre-requisite.

    Managers with the ability to thoroughly evaluate their investments, given the “backstop” risk, perform due diligence and source stable businesses or entrepreneurs and a platform allowing for tailored lending solutions are likely to have the most success.

""

Market Perspectives September 2021

Our investment experts highlight our main investment themes, looking at the outlook for the global economy, why we have raised S&P 500 earnings forecasts, prospects for UK rates, private markets and what the nearing COP26 climate talks mean for investors.

""

We give you versatility and a choice of services

Barclays Private Bank provides discretionary and advisory investment services, investments to help plan your wealth and for professionals, access to market.

Investments can fall as well as rise in value. Your capital or the income generated from your investment may be at risk.

This communication:

  • Has been prepared by Barclays Private Bank and is provided for information purposes only
  • Is not research nor a product of the Barclays Research department. Any views expressed in this communication may differ from those of the Barclays Research department
  • All opinions and estimates are given as of the date of this communication and are subject to change. Barclays Private Bank is not obliged to inform recipients of this communication of any change to such opinions or estimates
  • Is general in nature and does not take into account any specific investment objectives, financial situation or particular needs of any particular person
  • Does not constitute an offer, an invitation or a recommendation to enter into any product or service and does not constitute investment advice, solicitation to buy or sell securities and/or a personal recommendation.  Any entry into any product or service requires Barclays’ subsequent formal agreement which will be subject to internal approvals and execution of binding documents
  • Is confidential and is for the benefit of the recipient. No part of it may be reproduced, distributed or transmitted without the prior written permission of Barclays Private Bank
  • Has not been reviewed or approved by any regulatory authority.

Any past or simulated past performance including back-testing, modelling or scenario analysis, or future projections contained in this communication is no indication as to future performance. No representation is made as to the accuracy of the assumptions made in this communication, or completeness of, any modelling, scenario analysis or back-testing. The value of any investment may also fluctuate as a result of market changes.

Barclays is a full service bank.  In the normal course of offering products and services, Barclays may act in several capacities and simultaneously, giving rise to potential conflicts of interest which may impact the performance of the products.

Where information in this communication has been obtained from third party sources, we believe those sources to be reliable but we do not guarantee the information’s accuracy and you should note that it may be incomplete or condensed.

Neither Barclays nor any of its directors, officers, employees, representatives or agents, accepts any liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this communication or its contents or reliance on the information contained herein, except to the extent this would be prohibited by law or regulation. Law or regulation in certain countries may restrict the manner of distribution of this communication and the availability of the products and services, and persons who come into possession of this publication are required to inform themselves of and observe such restrictions.

You have sole responsibility for the management of your tax and legal affairs including making any applicable filings and payments and complying with any applicable laws and regulations. We have not and will not provide you with tax or legal advice and recommend that you obtain independent tax and legal advice tailored to your individual circumstances.

THIS COMMUNICATION IS PROVIDED FOR INFORMATION PURPOSES ONLY AND IS SUBJECT TO CHANGE. IT IS INDICATIVE ONLY AND IS NOT BINDING.