Against a volatile and uncertain economic backdrop, investors are seeking investment funds that offer stability, consistent returns, and portfolio diversification. While interest rate cuts are expected in 2024, the current high inflationary environment and stronger labour market indicate that the path ahead is not as straightforward as it seems. As a result, private credit has emerged as an attractive opportunity for investors seeking attractive risk-adjusted returns while navigating a complex financial landscape.
In this article, Albane Poulin, Head of Private Credit at Gravis Capital Management, explains why any investor seeking stable, long-term returns should consider investing in private credit in 2024.
- Higher yields and lower correlation
Private credit extends loans directly to non-publicly traded companies or individuals, offering financing solutions tailored to borrowers’ specific needs. Because these funds are targeted towards borrowers who usually have difficulty accessing capital through traditional banking channels, there is the opportunity to capture higher yields, enhancing income generation for investors.
Because private credit tends to lend to niche sectors or specific industries that are less sensitive to interest rate movements, and the loans originated by these funds often have shorter durations or variable interest rates, it can also provide investors with a degree of insulation from interest rate risk. What’s more, private credit offers a yield close to that offered by private equity and returns are converging. This means allocation to private credit is increasing as investors are moving up higher in the capital structure from private equity to private credit to capture similar returns with lower risk and more certainty of income and cash flow.
So, while the yields offered by traditional fixed-income investments such as bonds and treasury securities may be more attractive in a high interest rate environment, by allocating capital to private credit strategies, investors can complement their fixed-income allocations with an alternative asset class that offers higher yields and lower correlation to public markets.
- Diversification and risk mitigation
Diversification is a fundamental aspect of any resilient investment portfolio and private credit gives investors the opportunity to diversify their portfolios beyond traditional asset classes. This is primarily because private credit investments often target niche sectors or specific industries. For example, funds that are focused on real estate lending, infrastructure financing or venture debt provide investors with access to assets that possess intrinsic value and cash flow stability, irrespective of macroeconomic fluctuations.
While private equity managers tend to be naturally bullish in their outlook, private credit managers are naturally bearish, focusing more on the downside and making sure that money is paid back on time. This can bring important balance to a wider portfolio. Private credit fund managers will actively conduct thorough due diligence on potential borrowers, assess creditworthiness, and structure deals in a way that mitigates risk. Through rigorous underwriting standards and ongoing monitoring, private credit enables these managers to preserve capital and generate consistent returns for investors, even in challenging economic circumstances.
- Tailored solutions
Another benefit of private credit is that managers can tailor solutions to any desired risk profile. From AAA to B and any duration appetite from 2 to 40 years, the asset class can be adjusted to optimise any investment portfolio.
In periods of economic uncertainty or market dislocation, private credit funds also have the flexibility to capitalise on any opportunistic investments that may arise. This may be special situations, or mezzanine financing, which allows private credit to adapt its investment strategies to prevailing market conditions, unlocking value and generating attractive risk-adjusted returns for investors.
At Gravis today, we see better value in low investment grade (BBB-) to non-investment grade where we believe we can achieve similar returns to private equity but with a much lower risk profile, as well as generating stable and predictable cash flows.
We are also focused on investing in real assets, which provide the opportunity for our investors to participate in building a more sustainable future. In line with Gravis’ values, we aim to invest in businesses which contribute to the transition to net zero, and which make a positive social impact on local economies.
Conclusion
As global markets navigate increased economic volatility, technological disruptions and evolving regulatory landscapes, private credit funds are well-positioned to identify investment opportunities that emerge from such dynamics. And by deploying capital opportunistically and actively managing credit risks, these funds have the potential to generate stable, risk-adjusted returns for investors, and complement traditional equity and fixed-income allocations within a diversified portfolio.
