Conference Presentation, Panel, Fireside Chat
Credit Investors Taking the Reins | Middle East and Africa Summit 2024
Milken InstituteMichael Piwowar, Sandeep Chandak, Michael Gross, Zia Uddin, Orla Walsh, Mike Pivovar
- The Asian private credit market is projected to reach an inflection point and experience massive growth over the next five to ten years, with retailization occurring at a slower pace than in other regions.
- Global geopolitical risks, currency volatility, and equity market fluctuations are expected to impact Asia, while supply chain disruptions may simultaneously create capital formation opportunities.
- The US private credit market is evolving toward a beta-dominated environment where 80% to 90% of the market no longer represents pure alpha, leading to a convergence of returns with the syndicated loan market as large players are forced to reinvest capital continuously.
- The upper segment of the US market shows signs of stress with historical recovery rates dropping to 38%, suggesting that non-sustainable double-digit returns with zero losses will likely correct.
- Future US returns will likely align with public market returns if strategies fail to differentiate beyond cash flow lending, while the industry faces an arms race for scale where major players capture most fundraising.
- European private credit is expected to continue lagging behind the US but will see growth through convergence, with retail investors eventually gaining access to products similar to US Business Development Companies despite deployment and diversification challenges.
- Workout capabilities and the ability to recover value from distressed deals are identified as the primary differentiators and sources of alpha for managers across Europe, the US, and Asia.
- Retail penetration in alternatives currently stands at 6% and is projected to grow in an largely uneducated market, though returns for retail products are expected to decline and cascade into the institutional market due to 40-Act co-investment mandates.
- The US private credit market has seen the average EBITDA of portfolio companies increase threefold over four to five years due to retail capital influx, while institutional investors fear that team passivity in active management could lead to increased losses.
- Banks are deemed highly unlikely to return to the private credit market even with potential deregulation due to the sector's inherent flexibility, though local banking systems in emerging markets will likely be necessary to lower the cost of capital for private credit providers.
- A regulatory framework enabling lenders to foreclose on collateral and exercise rights is considered necessary for a successful ecosystem, with engagement on enforcement processes noted as a driver for higher quality credit in markets like India.
- Diversification is essential to avoid the failure modes of earlier European commingled funds that suffered from excessive concentration, while contagion from retail redemptions following initial defaults remains a fear despite low systemic risk.
- Investors face continuing fears of a "black swan" event or unknown future crisis, as well as the risk of inaction by teams leading to losses, and the possibility that businesses will access alternative capital forms during equity market volatility.