Skip to main content
MENU
Subscribe
  • Sign Up Free
  • LOGIN
  • Subscribe
  • Topics
    • Alternatives
    • Consultants
    • Coronavirus
    • Courts
    • Defined Contribution
    • ESG
    • ETFs
    • Face to Face
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Opinion
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Russia-Ukraine War
    • SECURE 2.0
    • Special Reports
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • WPS Innovation Awards
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • ESG Sustainability - Gaining Momentum
    • ESG Investing | Industry Brief
    • Innovation in ESG Investing
    • 2023 ESG Investing Conference
    • ESG Rated ETFs
  • Defined Contribution
    • Latest DC News
    • The Plan Sponsor's Guide to Retirement Income
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • Trends in DC: Focus on Retirement Income
    • 2023 Defined Contribution East Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Research Center
    • The P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
    • 2023 Canadian Pension Risk Strategies
    • 2023 Retirement Income
Breadcrumb
  1. Home
  2. INDUSTRY VOICES
December 13, 2022 06:22 PM

Commentary: Amid volatility and rising rates, private credit is increasingly attractive for pension funds

Julian Salisbury
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print
    Julian Salisbury
    Julian Salisbury

    Direct lending, or private credit, has grown rapidly to a global market of more than $1 trillion. It is now firmly part of the mainstream for institutional investors and is attracting sizable allocations from some of the world's largest pension funds.

    The relevance and appeal of private credit has grown over the last two decades (from $378 billion in 2012) as it has developed from a cottage industry to a major and sophisticated component of the market.

    Related Article
    Private credit investors turn to asset-backed loans

    Today, we think the risk-adjusted return potential for private credit is the strongest in its history.

    Because private lenders typically use floating rates, protection against inflationary pressures is the biggest factor drawing interest in the asset class, but it is far from the only one. The ability for private lenders to conduct in-depth diligence on borrowers and to build long-term, trust-based relationships, gives an entirely different character to comparable assets in the public markets.

    These relationships often prove their worth in times of turbulence and can be a significant advantage for the speed at which managers can source, conduct due diligence and execute new investments.

    Moreover, the terms of each loan can be customized to the borrower's circumstances, providing unique solutions that match their needs.

    Private credit loan pricing is more certain and less susceptible to volatility than syndicated loans and junk bonds. Investors are hesitant to buy bonds as fixed-rate debt has been adversely affected by rising rates, but the floating rate feature of leveraged loans can help protect them from inflation as yields will rise along with rates.

    This year, investment opportunities at a significant premium to historical averages have emerged, amid an uncertain macro backdrop.

    The investment universe for private credit is also growing, as expanded pools of capital and a better understanding of the asset class are encouraging a wider range of companies to tap private credit markets for larger deals.

    Investment opportunities are growing in structured and specialty asset finance and technology, along with the middle-market companies that have traditionally used private credit financing.

    Attractive opportunities also are appearing in defensive sectors and cash-flow generating businesses. Private lenders are now providing complete debt solutions to larger and larger companies across sectors, an option not seen even a few years ago.

    The attraction for financial sponsors and companies to engage with private lenders is clear: Private lenders can be nimble, offer certainty of execution, act with confidentiality and, most importantly, provide a long-term, trust-based relationship between borrower and lender.

    Related Article
    Interest remains high in private credit

    This year saw syndicated bank lending markets freeze over during some periods as investors grappled with geopolitical risk, persistent inflation and rapidly rising interest rates. For private equity sponsors looking to finance new acquisitions, private credit was able to step in, offering a lifeline in a troubled market.

    Recent public market volatility has only underscored private credit's appeal. The last decade of easy monetary policy was a boon for all asset classes, with a lot of return generated from asset-price inflation fueled by low borrowing costs. With rates increasing sharply, financial sponsors must now factor higher financing costs and a more uncertain economic outlook into their investment decisions.

    Experienced private credit managers bring back-to-basics investing to private companies, with the resources to conduct due diligence on new investments and create value during the investment period. As the cost of capital rises and valuations adjust, fundamental value creation by investors who know a company and its management team can drive returns.

    While public securities are marked daily, private market investors have the benefit of time and control. If there is trust and alignment between private equity sponsors, lenders, and portfolio companies, they are more likely to provide the right support to navigate turbulent times.

    Many high-quality companies do not want the burdens of going to public markets. The illiquid nature of private investing creates advantages because they are not impacted by market technicals or day-to-day movements in their cost of capital.

    More borrowers are exploring both public and private options; even the nearly $5 trillion investment-grade credit market is likely to have a large alternative private component in the future. The appeal of private credit when compared to bank-led financing stems from speed, flexibility, confidentiality, trusted partnerships and protection from inflation due to floating rates.

    For private credit managers, transaction quality is critical and depends on their scale, network and ability to execute. Successful managers can leverage relationships with both financial sponsors and companies that need access to capital to build their pipeline — the best opportunities tend to come from sponsors and companies that know the track record and abilities of managers that have navigated multiple cycles in the asset class.

    The need for capital remains, even as private credit is changing the way it is provided. This is creating exciting opportunities for smart institutional investors to enhance diversity, manage risk and pursue appealing returns as public markets shudder from rising rates and increased volatility.

    Investing successfully in private credit usually requires working with established managers that have strong sourcing ability and risk management experience. If approached correctly, private credit can help with diversification, manage risk and bring attractive returns to pension portfolios. In our view, the strength of the asset class is set to prove its worth in the coming cycle.


    Julian Salisbury is currently co-head of Goldman Sachs Asset Management and set to become CIO of Goldman Sachs Asset and Wealth Management when the two units combine at the end of this month. He is based in New York. This content represents the views of the author. It was submitted and edited under P&I guidelines but is not a product of P&I's editorial team.

    Related Article
    Top money managers see global stocks gaining in 2023
    U.S. inflation cools as consumer price index rises 7.1%
    Recommended for You
    Ryan McGlothlin
    Commentary: 2023 corporate pension plans — looming surprises or opportunity for more improvement?
    Olsen Sundberg combo
    Commentary: SEC's proposed climate change disclosures put CFOs under the spotlight
    Cyrus Jahanchahi
    Commentary: Is there finally value in U.S. high-growth stocks?
    Fixed Income: Navigating a Period of Transition
    Sponsored Content: Fixed Income: Navigating a Period of Transition

    Reader Poll

    April 26, 2023
     
    SEE MORE POLLS >
    Sponsored
    White Papers
    2023 Global Climate Survey - Are investors moving from aspiration to implementa…
    The Value of Value is Still Compelling
    Valuing Banks: Hidden Losses Versus Assets
    Research for Institutional Money Management
    Targeting Impact with Indexes
    Global Fixed Income: Volatility and Uncertainty Here to Stay
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    December 12, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2023. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Consultants
      • Coronavirus
      • Courts
      • Defined Contribution
      • ESG
      • ETFs
      • Face to Face
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Opinion
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Russia-Ukraine War
      • SECURE 2.0
      • Special Reports
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • WPS Innovation Awards
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • ESG Sustainability - Gaining Momentum
      • ESG Investing | Industry Brief
      • Innovation in ESG Investing
      • 2023 ESG Investing Conference
      • ESG Rated ETFs
    • Defined Contribution
      • Latest DC News
      • The Plan Sponsor's Guide to Retirement Income
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • Trends in DC: Focus on Retirement Income
      • 2023 Defined Contribution East Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Research Center
      • The P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
      • 2023 Canadian Pension Risk Strategies
      • 2023 Retirement Income