Private credit becoming evergreen allocation

NEW YORK: KKR & Co sees more investors permanently allocating to private credit alongside other fixed-income assets even as public credit markets regained some strength in recent months.

More of the firm’s clients are increasingly shifting the US$1.5 trillion private-credit market from a tactical allocation to an evergreen bucket, Christopher Sheldon, co-head of credit and markets at KKR wrote in an investor letter seen by Bloomberg.

That’s in spite a pick-up in issuance for syndicated loans and high-yield bonds this year that has allowed banks to compete more aggressively with private credit funds to finance deals.

“When we’re talking to clients or allocators, it’s becoming a permanent allocation,” Sheldon said in a phone interview.

“That’s a tailwind and on the flip side, we’re seeing it becoming a permanent financing tool for sponsors. It’s a clear path for the asset class.”

Sheldon sees the pace of growth in private credit as sustainable without usurping the traditional role of banks in syndicating debt.

A number of recent acquisitions deals have seen sponsors launch dual-track processes, where banks and private credit lenders are asked to pitch alternative financing options.

Carlyle Group Inc is dual tracking its potential acquisition of some units of Medtronic Plc, while Blackstone Inc and Permira are pursuing a similar strategy for their potential take-private of Adevinta ASA, Bloomberg previously reported.

Private credit has grown rapidly over the last few years as managers raised billions in dry powder and took advantage of bouts of volatility in the broadly syndicated debt and a regional banking crisis in the United States to take market share away from investment banks.

While direct lending to corporates remains a large share of private credit fundraising, lenders are also expanding into new areas such as asset-based finance.

Ratings firm Moody’s Investors Service has raised concerns that the competition among direct lenders and banks who syndicate public debt could prompt a “race to the bottom” in covenants, or terms that govern lending.

And strategists at Bank of America Corp recently projected a 5% default rate in private credit by early next year, exceeding a 3% projection in leveraged loans in the same environment.

“While we think these trends in the broader market are worth watching, we wouldn’t read too much into the quarterly changes,” Sheldon wrote in the investor letter, referring to default rates and other measures such as covenant breaches and interest coverage that are typically used to measure the financial health of corporate borrowers.

“Performance is going to be idiosyncratic and credit by credit.”

KKR’s private-credit strategy is focused on larger businesses that the firm sees as better placed to withstand economic headwinds and borrowers with which it already has a lending relationship.

“Where we’re willing to be more aggressive in structures is really in large, high quality, and diverse capital structures and where loan-to-value is very low,” Sheldon said in the interview.

“A lot of our recent deployment in private credit has been to incumbent borrowers we know and are already lending to.” — Bloomberg