Trump’s tariffs threat could hit private credit borrowers
DONALD Trump is set to become the president of the United States once again and although the removal of uncertainty has been welcomed by many alternative asset managers, some are cautious about what potential policies will mean for private credit investors.
“If protectionist policies are enacted, international investors will need to consider the potential impact on global corporates as it relates to non-dollar assets, stability of supply chains and risk-adjusted capital allocations to ensure there is adequate coverage for tariffs (if rolled out) and the degree to which trade policy, currency implications and increased legislation could impact operating margins,” commented Maggie Arvedlund, chief executive of Turning Rock Partners.
“All asset-backed players will undoubtedly be re-underwriting
their portfolios to assess winners and losers under new international trade regimes,” she added.
While a Trump administration is expected to be more light touch on regulation, the president-elect could pursue protectionist policies and implement increased tariffs.
Analysts at S&P Global Ratings said in a recent note that they believe “a universal tariff and sharply higher tariffs on Chinese imports
could mean an increase in US inflation, and a drag on GDP growth”.
This in turn will affect many industries, such as tech, due to higher input costs and margin pressures. Companies like port operators or transportation leasing companies can also be hurt, as well as utilities and power companies, retail and restaurants, consumer products, healthcare and building materials, the analysts at S&P said.
Michelle Russell-Dowe,
co-head of private debt and credit alternatives at Schroders Capital agrees that tariffs will likely increase the potential for supply-side inflation, which is not something that Fed policy can easily influence.
“Inflation alongside a ‘normalising cycle’ is an odd concept, this will likely result in a higher terminal Fed Funds R ate than what was previously anticipated,” she said.
“This likely means income realised along the
124 City Road, London, EC1V 2NX info@royalcrescentpublishing.co.uk
EDITORIAL
Suzie Neuwirth Editor-in-Chief suzie@alternativecreditinvestor.com
Kathryn Gaw Contributing Editor kathryn@alternativecreditinvestor.com
Hannah Gannage-Stewart Senior Reporter hannah@alternativecreditinvestor.com
Selin Bucak Reporter
PRODUCTION
Tim Parker Art Director
COMMERCIAL
Tehmeena Khan Sales and Marketing Manager tehmeena@alternativecreditinvestor.com
SUBSCRIPTIONS AND DISTRIBUTION tehmeena@alternativecreditinvestor.com
Find our website at www.alternativecreditinvestor.com
Printed by 4-Print Limited ©No part of this publication may be reproduced without written permission from the publishers.
Alternative Credit Investor has been prepared solely for informational purposes, and is not a solicitation of an offer to buy or sell any private debt product, or any other security, product, service or investment. This publication does not purport to contain all relevant information which you may need to take into account before making a decision on any finance or investment matter. The opinions expressed in this publication do not constitute investment advice and independent advice should be sought where appropriate. Neither the information in this publication, nor any opinion contained in this publication constitutes a solicitation or offer to provide any investment advice or service.
It’s natural, in business, always to be looking for the ‘next big thing’ in order to stay ahead of the curve.
Within alternative credit, direct lending has been the star of the show for so long that it’s unsurprising that stakeholders are looking for different opportunities, especially as spreads tighten and yields fall in the highly competitive upper-mid market.
Asset-backed finance (ABF) has been touted as the ‘new direct lending’, offering stable, uncorrelated returns from investing in secured loans across a diverse array of sectors.
But ABF isn’t the only contender for direct lending’s crown. Private credit CLOs, significant risk transfers and fund finance are also predicted to see skyrocketing growth in the years to come.
These areas of the market are all very exciting and are likely to grow substantially, but it’s important not to get caught up in the hype. It’s still relatively early days for some of these products and they are likely to experience their own challenges and pitfalls as they mature. Once the novelty has waned, it will be interesting to see where LPs allocate their funds and whether bread-and-butter direct lending maintains a more dominant position than some onlookers anticipate.
SUZIE NEUWIRTH EDITOR-IN-CHIEF
cont. from page 1
forward curve postelection should be higher than expectations for income pre-election. The tariffs are likely to create price increases for US consumers (and possibly global consumers), and this is likely a negative for the weaker or ‘financially insecure’ consumer groups, especially weaker or younger consumers. Deportation is also likely to increase labour costs.”
Although Ana Arsov, global head of private credit at Moody’s Ratings still expects a few rate cuts in 2024 and 2025, she said that the pace or magnitude of the
cuts could slow down if inflation resurges.
However, she added that she expects the private credit market to continue to grow, particularly due to changes in regulations.
"Given that the US is the largest private credit market for the deployment of funds in private credit, US regulations are crucial,” she said. “Although it is still early and we lack full visibility of future policies, we believe that the private credit market is likely to grow further, regardless of the geographic exposures
of the funds.”
For Russell-Dowe it is also likely that the yield curve will steepen.
“It’s likely an increasingly steep yield curve will not be the result Trump desires, and this is likely to result in rhetoric around dissatisfaction with the Fed,” she said.
“The impact of rising 10-year yields means debt that finances off that point in the yield curve will have a greater challenge refinancing –commercial mortgage loans to name one.
“US residential mortgage rates are
also likely to increase, continuing to push housing out of reach for first time buyers (a political challenge). Higher 30-year rates mean pensions get more fully funded and more US pension plans de-risk as demand for debt increases. These factors demand a short duration positioning today and a cautious approach to maturing debt, and the potential for additional strain on CMBS/CRE. Prepayment speeds are likely to be slower than expected on more recently originated mortgages.”
Resi real estate and hospitality tipped for influx of ABF investment
RESIDENTIAL real estate and hospitality have been tipped as the next big growth areas in assetbacked financing (ABF) due to supply/demand imbalances, as the popularity of ABF soars.
According to KKR research, the current size of the ABF market is $5.2tn (£4.1tn), but it is set to grow to $7.7tn by 2027 as more and more alternative asset managers move into the space. This is likely to lead to competition for the most attractive assets.
According to several ABF specialists, this means residential real estate and
hospitality.
“Arrow has been building up our real estate lending franchise for a long time in the granular, operationally heavy residential bridge and development lending sectors, which has become increasingly a focus for investors,” said Toni McDermott, chief investment officer, credit and lending, at Arrow Global.
“The risk/reward is attractive here because of chronic undersupply of housing to meet growing demand, poor quality of existing housing stock needing upgrade,
and lack of alternative financing from banks.
“Conversely, office properties, especially in secondary locations, continue to be less appealing due to uncertain recovery prospects and demand shifts post-pandemic.”
Hayley Stewart, director, investor relations at RoundShield, says that in an inflationary environment residential real estate often benefits from underlying asset value appreciation, making for some compelling opportunities.
“We have also seen
robust growth in the hospitality sector and here we see opportunities in the affordable travel market sector, as well as the luxury hospitality and high-end residential markets,” she added.
“Favourable supplydemand dynamics, given the rebound in travel post-Covid, increasing global wealth creation and the drive of many towards Europe as a destination of choice given its ease of access and rich cultural heritage are creating opportunities in the hospitality market.”
To read more on ABF, see our feature on page 16.
Lack of valuations pose risk in secondaries market
A LACK of independent valuations has been highlighted as a risk in the lower mid-market for secondary buyers.
The private credit secondaries market has been growing, as investors increasingly seek early liquidity in a traditionally illiquid asset class.
Ryan McGovern, managing director and investment committee member at specialist lower mid-market investor Star Mountain, told Alternative Credit Investor that he sees strong opportunities for further growth, but warned that portfolio deterioration is a risk for secondary buyers.
“You buy [the portfolio]
at a certain price based on the valuation of the fund and its underlying assets at a certain reference date and if the valuation deteriorates after that, the discount you may have bought it at may not be sufficient to cover the deterioration in value,” he said. “That’s why it's very important to understand the underlying
portfolio assets that you're buying into.
“That's part of the challenge within the lower middle-market, particularly as there is typically no third-party independent quarterly portfolio valuations done. So, understanding those underlying portfolio investments by doing as much due diligence
on the portfolio before buying the LP stake is crucial and our synergistic direct private credit investing business allows us to do so.”
Private markets valuations have been under scrutiny, with regulators and central banks questioning their opacity. Earlier this year, the UK’s Financial Conduct Authority confirmed that it plans to undertake a review of private market valuations. This followed the introduction of new rules by the US Securities and Exchange Commission last year to improve the transparency of private market funds.
RoundShield mulls launch of sixth fund
ROUNDSHIELD is planning to launch the sixth iteration of its private credit fund “in the not-too-distant future,” following the oversubscription of Fund V.
The investment firm, that focuses on asset-backed finance, closed its fifth fund in September with more than $1bn (£0.79bn) in commitments, $150m above target. This makes it the largest fund in the firm’s 11-year history.
“Demand was particularly strong from
our existing LPs, who represented 80 per cent of the investors in this vintage,” said Hayley Stewart, director, investor relations at RoundShield.
“We are actively and selectively deploying capital into a very healthy pipeline that we are excited about, and the deals are tracking or exceeding expectations to date.”
Stewart added that at present RoundShield’s focus is on deploying capital for Fund V, but said that “given the strength of our current
pipeline, we would expect a Fund VI in the nottoo-distant future.”
RoundShield prefers to invest in Western European real estate, infrastructure and financial assets as these categories offer both significant size and diversity such that they will not become saturated. Within these categories, the firm prefers deal sizes in the €20m (£16.7m) to €150m range.
“Beyond real assetoriented situations, the current environment creates capital structure
uncertainty but also opportunity for specialty finance businesses, driving the need for flexible capital providers with the capability to structure deals creatively,” added Stewart.
“Credit provision to legal asset funders, revolving multipurpose facilities to funding platforms and specialised trade finance are just some of the opportunities we are spending time on, offering attractive risk adjusted yields for well-placed investors.”
Bridge the Gap
We’ve fully integrated our market-leading private credit loan reporting and accounting systems to provide you with a single source of truth.
Don’t accept disconnected data... in Fund and Corporate Services
The results? Information on demand, data you can trust and real time decision-making. And with our dedicated team of private credit professionals by your side, you’ll have specialist expertise you can call on every step of the way.
To find out more visit aztec.group/private-credit
New direct lending loans see uptick in quality
THE 2024 cohort of direct lending loans are of a higher credit quality than in previous years, with conditions expected to improve further next year.
At Morningstar DBRS' 2025 Credit Outlook London event last month, Cristina Ramirez, VP, sector lead of European private credit ratings at Morningstar DBRS, said that “new deals in 2024 are stronger than those signed three years ago.”
“Investors are incorporating higher interest rates, leverage is lower and credit quality this year is different,” she added.
Kevin Meyer, managing director, head of origination at Churchill Asset Management, agreed that the 2024 cohort of direct lending loans demonstrates stronger credit quality compared to prior years.
“The financing markets remain active, but bankers have been more selective, focusing on ‘financeable deals’,” he added.
“This contrasts with the 2022-2023 vintages, where some transactions faced challenges due to concerns around financing attachment
points and broader market headwinds, often stalling processes. In 2024, only higher-quality, A-to-B assets have successfully found a home, while riskier opportunities have been directed toward lenders with a different risk appetite.”
However, Albane Poulin, head of private credit at Gravis, thinks that this year has been more about “setting the scene” and that the real improvement in credit risk will occur next year.
“Starting with the macroeconomic conditions, higher interest rates, higher inflation and general market uncertainty have, in some cases, led to more conservative
underwriting standards, especially in the real estate lending sector,” she said.
“Some lenders have also set stricter covenants in loan agreements providing better protection and greater control.
“Default rates rose in 2024, especially in the US, where the healthcare sector, telecom sector and business services were the largest contributors to defaults reflecting macroeconomic pressures and secular declines.
“Now interest rates have peaked and started to fall, and inflation has moderated, borrowers’ ability to service their debt is expected to improve. Lower funding costs will reduce refinancing
risk and default rates will fall in 2025.”
While newer direct lending deals are seeing an improvement in their risk profile, older deals are expected to see more downgrades by ratings agencies.
Mid-market companies have been hardest hit from higher rates in recent years due to higher leverage on deals.
Most of their financing tends to be variable, floating rate loans which were heavily impacted when central banks began aggressively hiking interest rates in 2022.
Morningstar DBRS has been taking 3.4 negative rating actions for every positive one, in this segment of the market.
Alternative Credit Awards 2024: Winners and photos
THE ALTERNATIVE Credit Awards took place on 6 November at the Royal Lancaster London, where the winners of this year’s accolades were unveiled in a glittering ceremony.
The event, hosted by Alternative Credit Investor, attracted the cream of the industry for an evening of networking and celebrations.
Ares Management picked up the most trophies on the night, winning the awards for Fund Manager of the Year, Fund of the Year ($1bn+) for Ares Senior Direct Lending III, and Innovative Fund of the Year ($1bn+) for Ares Pathfinder Fund II. Oaktree Capital Management
won in the categories of Special Situations Debt Manager of the Year and Market Commentator of the Year.
And Permira Credit won the award for Senior Lender of the Year.
Meanwhile, UK SME lender Folk2Folk was named P2P Lender of the Year, while Kuflink was awarded UK Bridging Lender of the Year.
Among the service providers, Ocorian was the winner of the Compliance Service of the Year category, and BNY picked up the trophy for Fund Administrator of the Year.
“The Alternative Credit Awards
2024 were a great success and I’m delighted that the event recognised the industry’s leading players,” said Alternative Credit Investor’s founder and editor-in-chief Suzie Neuwirth.
“We had such a fantastic array of firms represented on the night and I’d like to thank everyone who attended for helping to make it such an amazing event.
“Additionally, congratulations to all those firms who picked up trophies on the night!
“We have lots of exciting events planned for next year that I can’t wait to share with the industry, and I look forward to an even bigger and better awards event in 2025.”
The winners of the Alternative Credit Awards 2024
Climate Transition Fund Manager of the Year
Apollo Global Management
Distressed Debt Manager of the Year
Arrow Global
Fund Manager of the Year
Ares Management
Fund of the Year ($1bn+)
Ares Senior Direct Lending III
Fund of the Year (Sub $1bn)
TwentyFour Income Fund
Impact Fund Manager of the Year
BNP Paribas Asset Management
Infrastructure Debt Manager of the Year
Macquarie Asset Management
Innovative Fund of the Year
($1bn+)
Ares Pathfinder Fund II
Innovative Fund of the Year (Sub $1bn)
NorthWall European Opportunities Fund I
Highly commended: AxiaFunder
Junior Lender of the Year
Churchill Asset Management
Lower Mid-Market Lender of the Year
Federated Hermes
Market Commentator of the year
Oaktree Capital Management
ALTERNATIVE CREDIT AWARDS 2024
Mezzanine Lender of the Year
Shojin
Performance of the Year
($1bn+)
Fasanara Capital Global
Diversified Alternative Debt Fund
Performance of the Year (Sub $1bn)
Fintex Private Debt
Private Credit Secondaries fund of the Year
Coller Credit Secondaries –Opportunities Fund I
Real Estate Debt Manager of the Year
LaSalle Investment Management
Senior Lender of the Year
Permira Credit
Highly commended:
Triple Point Private Credit
Special Situations Debt Manager of the Year
Oaktree Capital Management
Wealth Market Proposition of the Year
M&G Investments
UK Property Development Lender of the Year (sub-£1bn)
Relendex
UK Bridging Lender of the Year (sub-£1bn)
Kuflink
UK SME finance provider of the year (sub-£1bn)
ThinCats
P2P Lender of the Year
Folk2Folk
IFISA Provider of the Year easyMoney
Compliance Service of the Year
Ocorian
Fund Administrator of the Year
BNY
Highly commended: Suntera Fund Services
Law Firm of the Year –Transactions
Dechert
Law Firm of the Year –
Fund Structuring Linklaters
Placement Agent of the Year
Rede Partners
Ratings Provider of the Year
S&P Global Ratings
Tech Provider of the Year
Broadridge Financial Solutions
Highly commended: Allvue Systems
Ares won the award for Fund Manager of the Year
Permira won Senior Lender of the Year
Arrow Global picking up the award for Distressed Debt Manager of the Year (host Daisy McAndrew pictured right)
Federated Hermes picked up the trophy for Lower Mid-Market Lender of the Year
Ocorian won Compliance Service of the Year
Linklaters won in the category of Law Firm of the Year - Fund Structuring
The award for UK Property Development Lender of the Year went to Relendex
Kuflink won the award for UK Bridging Lender of the Year
Riding the wave
Asset-backed finance (ABF) has been the success story of the year. Kathryn Gaw looks at the current ABF landscape and asks where the asset class goes from here
TO
SAY THAT ASSETbacked financing (ABF) is a rapidly growing market would be an understatement.
According to KKR research, by the end of 2022 the ABF asset class was 67 per cent bigger than in 2006 and 15 per cent bigger than it was in 2020. KKR expects the market to grow from its current size of $5.2tn (£4.1tn), to $7.7tn by 2027. Goldman Sachs believes the ABF market is already worth more than $15tn.
Whatever its true value, there is no denying that its growth has been astronomical, thanks to a combination of demand for non-bank finance and investors’ need for yield.
The rise of ABF began in the immediate aftermath of the
is backed by collateral, and whose repayment comes directly from those secured or ring-fenced cash flows. Investors appreciate the extra layer of security that comes from the collateral; while borrowers appreciate the accessibility of ABF during a time when bank funding is extremely difficult to come by. Today, around a third of this market is financed by non-bank lenders, according to Oliver Wyman data. Among those nonbank lenders are the alternative asset managers who have been honing their ABF skills over the years, and are now expanding their footprint in the market.
In the year to date a wave of new ABF strategies and products have hit the market in
“ The next chapter in the private credit story is the migration of ABF toward alternative capital providers”
global financial crisis, when new regulations led banks to pull back from non-mainstream lending activities or those requiring higher regulatory capital. This created the space for alternative capital providers to step in and plug the funding gap. ABF soon emerged as a financing solution that appealed to both borrowers and investors.
At its core, ABF is lending that
response to soaring demand.
In January, the TCW Group established an ABF business supported by capital commitments of more than $1bn. Channel Capital Advisors launched a new asset-backed private credit strategy for borrowers in the “innovation economy”. Ares Management announced a $1.5bn joint venture to fund prime new vehicle leases
with Certified Automotive Lease Corp. Around the same time, SEC filings revealed that Pacific Investment Management Co (Pimco) had raised more than $2bn for its asset-based lending strategy over the summer months.
Meanwhile, in September the ABF-structured RoundShield Fund V closed with more than $1bn – around $150m above its target. The response to this fund was so strong that RoundShield is planning to a sixth iteration soon.
“Banks have shifted towards more
mass market products like retail mortgages and retreated from more capital and operationally intensive speciality finance,” says Toni McDermott, chief investment officer, credit and lending at Arrow Global.
“This has created an opportunity for those private credit providers with the necessary experience and operational capability to fill the gap.”
According to Oaktree Capital’s latest quarterly performing credit report, ABF is fast becoming the domain of alternative asset managers.
“As traditional lenders face further headwinds, we believe the next chapter in the private credit story is the migration of ABF toward alternative capital providers,” said the report’s authors Armen Panossian, co-chief executive and head of performing credit, and Danielle Poli, managing director and assistant portfolio manager at Oaktree.
“While the asset class isn’t new – lending against contractual revenue streams has historically been a cornerstone of bank and insurance company activity – the
fundamental transition lies in who now provides the capital.”
Private credit fund managers certainly have the funds and the expertise to fill this financing gap. But expertise is the key word.
As ABF becomes an ever more significant part of the private credit sector, the ability to manage the risk of asset depreciation and borrower defaults will become paramount.
“In order to properly manage what can be operationally intensive assets and mitigate the risks of possible covenant breaches or defaults
in the future, asset management should also be a key focus of any GP investing in ABF, and indeed of any LP evaluating managers in the space,” says Hayley Stewart, director, investor relations at RoundShield.
Arrow’s McDermott agrees, describing ABF as “granular and local, requiring operational capability, relationships and risk experience built up over many years.”
ABF is a very broad church, encompassing an endless range of assets which are being financed in increasingly creative ways. But the quality of an ABF loan can vary wildly depending on the nature of the underlying asset, and the ability of the fund manager to correctly price in the risk. This means that LPs are even more reliant than usual on the expertise of their GPs at a deal level.
“For LPs, the focus should be on selecting the right manager, considering experience and length of track record in the sector, as well as experience in enforcements and/or workouts to feel secure in the manager's capability to protect capital and deliver returns,” says Stewart.
“Further, LPs should consider the risks of entering into ABF subcategories that might be inherently too niche, and where returns might disappear with capital inflows.”
This is an incredibly specialised industry with a diverse array of assets underpinning each deal. This diversity makes it hard to compare like-for-like portfolio risk, so there are no shortcuts when it comes to investor due diligence. However, that same ability to diversify also adds to the appeal of ABF.
“We have been supporting GPs across auto loans, credit card receivables, trade receivables, mortgages, small- and medium-sized
“ Diversification has been the key theme across these portfolios”
enterprise loans, equipment leases, aircraft leases, residential solar, litigation finance, maritime leases, royalties, and more,” says Kanav Kalia, director at Oxane Partners.
“Diversification has been the key theme across these portfolios.”
“Diversity is important and not to get lulled to sleep by synthetic diversity,” adds Kyle Asher, managing director and co-head, alternative
credit solutions at Monroe Capital.
“You have to have diversity across asset classes and a number of different transactions. We're very much believers in diversity, and have to set up our business that way to ensure we can do a lot of different transactions because ultimately, sometimes there's just things you can't predict, no matter how much work you do and how much structuring you do, because it's real life and it's investing.”
The legal complexity of structuring transactions and ensuring accurate valuation frameworks can be immense. This is particularly true in the European market, where ABF is still a relatively new concept. Unlike in the US, the banking systems
and capital markets infrastructure in Europe are fragmented, so financing assets in Europe requires local language, market, regulatory, tax and legal expertise. But savvy fund managers can use these challenges to their advantage.
“This fragmentation and supplydemand fundamentals gives rise to opportunities which Arrow has positioned itself to capitalise on through longstanding ownership of local best-in-class lending and investment franchises,” says McDermott. “The US market has a more unified landscape, which can simplify ABF transactions, making them more competitive.”
As ABF has grown on both sides of the Atlantic, innovation
has come to the fore. In order to set themselves apart, GPs are introducing new structures and covenants into their ABF deals, and moving into even more niche areas.
Channel Capital recently participated in an ABF funding round for FlapKap, an Abu Dhabi-based fintech which provides revenue-based finance and embedded finance solutions. In this particular ABF deal, the asset is the revenue.
“The underlying revenue contracts and flows are the principal form of repayment to fund investors,” explains Walter Gontarek, chief executive and chairman of Channel Capital Advisors.
Gontarek believes that ABF should be “self liquidating” and so he is reluctant to sign off on loans secured against real assets such as yachts or cars, which could be difficult to locate and sell on in the case of a default.
“There are different types of collateral which would have different impact on the valuation of your ABF,” he adds.
Meanwhile, Monroe’s ABF business covers everything from equipment leasing, to media royalties, to real estate, and –more recently – asset covered transactions including digital infrastructure elements.
The recent influx of ABF-themed products and services suggests that we are only at the beginning of the ABF growth story. More and more borrowers are seeking out non-bank lending solutions, while investors are prioritising higher yields with better downside protection.
Even the notoriously riskaverse pension funds are starting to allocate into ABF strategies. In July, the California Public Employees’ Retirement System
committed more than $1bn to an asset-based finance strategy managed by Sixth Street Partners. Some industry experts now believe that pension funds represent the future of the segment.
“We're seeing interest from some of the larger pensions and more sophisticated investors,” says Asher. “Some of that's driven by their advisors that tend to be a little bit more forward thinking. We're seeing significant interest from those types of folks.”
“Institutional investors like insurance companies and pension funds are seeking to diversify their private credit exposure beyond corporate debt,” adds Kalia.
“Private ABF allows investment managers to tailor portfolios based on risk and return profiles of investors.”
ABF’s appeal is obvious, but as it becomes a more significant pillar of the private credit sector, the asset class will face more scrutiny. Poor due diligence or a lack of specialised knowledge will eventually expose the bad managers, while the good managers will be able to harness the current momentum and carve out a lucrative space in the market.
“I think we're in the initial innings of the investor interest in the asset class,” says Asher. “I think it's going to grow significantly from an institutional investor standpoint. I think it's going to be a large investor focus for probably the next seven or eight years and beyond.”
As the asset class matures, it will continue to attract capital from a wider range of investors who will bring their own innovations and niche assets to the table.
In a challenging financial landscape, ABF seems to have something to offer everyone.
