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9Questions is our Q&A series featuring key decision-makers in the corporate credit markets — get in touch if you know who we should be talking to!

Goldman Sachs took its first foray into private credit markets almost 30 years ago with the formation of GS Mezzanine Partners I, a 1996 vintage mezzanine fund with $1.2bn in available capital. Since those nascent days, Goldman’s private credit business has grown to comprise four strategies with more than $100bn of assets under management.

As a 23-year company veteran, James Reynolds, global head of direct lending at Goldman Sachs Asset Management and co-CEO at Goldman Sachs Asset Management International, has certainly been around the recessionary block a few times. Reynolds sat down with 9fin to share his insights on the direction private credit is charting at a crucial moment, as global markets eagerly anticipate the arrival of a soft landing and ensuing rate cuts in the coming months.

1. Cautious optimism seems to be the prevailing economic outlook heading into 2024, what can we expect for private credit this coming year?

The opportunity set for private credit remains highly attractive. Competitive pressure to deploy capital has driven spreads tighter versus last year, but yields on senior secured loans are still attractive compared with recent years.  On the junior debt side, we are seeing a mix of second lien cash pay and holdco debt opportunities, often with a payment-in-kind (PIK) feature. The tightening of spreads and re-opening of the syndicated first lien market is helping to create attractive junior debt opportunities for high quality companies with significant equity cushions.

Looking ahead, we expect private credit to deliver outperforming risk-adjusted returns in 2024. In public markets, there is broad acceptance that the Fed has successfully engineered a soft landing of the economy. For 2024, our global investment research (GIR) credit strategists expect the syndicated market to benefit from modestly tighter spreads, making carry the dominant component of returns. Private credit is typically priced at a premium to the syndicated market, and rangebound performance would translate to outperformance.

We expect continued inflows into the private credit asset class as investors seek to increase target allocations. Increased assets under management will continue to drive greater depth of capital, and we expect this to translate into continued expansion of private credit into larger cap names. We also expect a resurgence in M&A activity to drive more pipeline opportunities in 2024 as private equity sponsors seek to return capital to investors in the context of a more stable interest rate backdrop.

Higher-for-longer funding costs will test the ability of fully levered companies, leading to an uptick in financial distress, but we expect lower credit losses in private markets versus the broadly syndicated loan market.

2. How do you anticipate private credit will compete with syndicated markets as they kick back into gear this year?

Over the past two years, the syndicated markets have experienced dislocation, and, as a result, less capital has flowed into the space. Private credit was the beneficiary of this disruption.

In early 2024, however, syndicated markets are showing strength and we have seen some issuers with private debt pivot to the syndicated market to reprice their debt at tighter levels. If public markets continue to be attractive, we expect this trend to continue, particularly given the hard call protection that is typical for many private credit deals will be rolling off for deals executed in 2021 or 2022.

However, we’ve also seen issuers who previously relied upon the syndicated market, refinance in private debt markets. While syndicated markets may gain traction in financing activity versus the prior two years, we expect both markets to continue to co-exist and we are optimistic about private credit’s ability to maintain a larger share of the pie than it has historically.

We expect private credit to continue to be an important driver of refinancing activity for credits that require creative solutions given the rapid rise in base rates. Private credit's ability to offer delayed draw features, PIK flexibility capital, and other features can be compelling to issuers facing near-term maturity walls.

3. What disruptive technology do you think will influence private credit investing most in 2024?

We believe generative AI and more advanced data analytics will continue to influence private credit, though we expect that adoption of AI and corresponding efficiencies may take time. From an investment perspective, these technologies could be particularly impactful in the context of scenario analyses such as interest rate policy developments or M&A transaction volumes. AI also has the potential to add tremendous efficiency to fund servicing, including due diligence processes, automation of calculations, as well as ESG reporting.

4. What is one trend you see emerging in private credit that concerns investors?

One investor concern is whether too much capital is chasing too few opportunities. We do not believe this to be the case. Rather, we believe that private credit is benefiting from long-term secular growth underpinned by many factors.

The secular decline in bank lending has allowed private credit to take share from syndicated markets. While some of this may be regained, issuers have become more comfortable turning to private credit markets to support financing needs. The private credit market makes up about a third of the total credit market, which is still relatively small and leaves ample runway for growth.

There is also still significant undeployed capital held by private equity sponsors that will translate to future opportunities. This, combined with private credit’s ability to support larger deal sizes, creates opportunity for future growth.

5. We have yet to see how private credit fares in a recession. Is a recession possible this year and what would be the biggest risk to the asset class in an economic downturn?

Higher-for-longer base rates will create challenges for fully levered companies. However, company fundamentals have remained resilient, albeit with meaningful dispersion. We expect default rates to tick upward but remain muted, with lower loss rates than the syndicated market.

Fewer lenders typically participate in private credit deals, which reduces coordination and promotes faster resolution. The take-and-hold strategy of private credit creates similar incentives amongst lenders as compared to publicly traded loans, where buyers may have different cost bases and motivations. Large direct lenders have low issuer concentration at the portfolio level, low loan-to-value ratios for the large positions, and perhaps more importantly, tighter controls on due diligence, covenants, and structures. In general, companies have been very proactive in trying to manage their debt maturities. 

6. Do you think US and European debt markets will move in lockstep this year, or could we see different dynamics play out across the two regions?

From a macroeconomic perspective, we expect similar directional trends across the US and Europe, although not entirely in lockstep.

Core inflation is easing across both regions and our economists expect rate cuts to start in April in Europe and May in the US and UK. That said, macroeconomic pressures may remain relatively stickier in Europe than across the pond. Our house view for 2024 GDP growth (Q4/Q4) is 2.4% in the US, 1.3% in Europe, and 1.0% in the UK.

We expect M&A volumes to rise in both regions in 2024, following a year where loan issuances were primarily driven by extensions and refinancings. We expect a pickup in public-to-private (P2P) deal volumes, particularly in Europe, driven by lower public market valuations, a slight spread tightening in BSL markets, and a continued increase in deal size.

Regional nuances across Europe may influence differences in transaction volumes, public debt issuance volumes, and credit quality impacts at the country level. Fewer private debt managers of scale in Europe may also result in stickier pricing and terms compared to the US. 

7. The Asia Pacific (APAC) region has witnessed the growth of a nascent private credit market in recent years, how will the asset class develop in the region moving forward?

Asia is a driving force for global growth, with 5 of the world's 15 largest economies. Strong economic growth in the region is driving increased demand for credit financing.

Traditional banks, who dominate the lending landscape in Asia, have retrenched. At the same time, global private equity firms have been expanding their Asia presence amidst 2023’s slowdown in deal activity. Private equity sponsors are increasingly tapping private credit in the region to seek flexible terms not offered through traditional local financing channels.

From an investment perspective, private credit deals in Asia generally offer lower leverage versus other regions, attractive relative value, favourable deal terms, and portfolio diversification. Goldman Sachs Asset Management has a longstanding private credit platform in Asia, and we have recently signed a number of large partnerships that position us well across the continent.

8. Goldman Sachs raised its first mezzanine fund in 1996. What advice can it lend to new private credit players in an increasingly competitive market?

Credit investing has capped upside potential, and, as a result the best way to drive strong performance is to avoid losses. Focused credit selection and a disciplined approach to underwriting and investing through market cycles are key to a successful track record. 

Relationships are critical to success because lending is a trust-based business. During times of lower market activity, incumbency can be a strong driver of deal flow. Sponsors value partners who can make quick decisions, speak for size, and provide certainty.

9. What has been the most interesting business trip of your career, and why?

I’ve been lucky enough to travel all over the world for work, building long-term relationships with investors, sponsors, and management teams in every region. Outside of work, I’m passionate about sports and in particular tennis. I’ve been involved with Greenhouse Sports, a charity that uses sport to engage young people and improve their life chances, for many years. 

Perhaps my most memorable business trip was a trip to Melbourne, Australia, when I found myself seated next to tennis legend Rod Laver on his eponymous court at the Australian Open watching Roger Federer.

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9Questions — James Reynolds, Goldman Sachs — Soft landing, full steam ahead?

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