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Private Credit 

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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!

Opportunistic credit strategies within the private credit market are a hot niche to occupy right now. As LPs look to diversify their holdings and eke out those incrementally higher yield, it’s surely a strategy that’s going to continue to grow in the coming years.

While ‘opportunistic credit’ has been around for years, it can take various forms for different managers. Morgan Stanley is among the firms that have a long track record in opportunistic private credit.

9fin sat down with Ashwin Krishnan, co-head of north America private credit and the head of opportunistic credit at Morgan Stanley, to talk about the opportunities (pun intended) ahead for the strategy in 2025.  

1. Opportunistic credit is a broad term. How would you define it currently?

At Morgan Stanley Private Credit, we define opportunistic credit as providing credit capital solutions to private companies through debt and hybrid capital. Our focus and “sweet spot” is middle-market companies. The businesses tend to be smaller than those that can tap the capital markets and has been a core focus of the MSIM alternatives platform over time. The flexibility of the strategy enables us to support a wide range of financing use cases, and we are comfortable in both private equity-sponsored and unsponsored companies.

2. Multiple managers were in the market with opportunistic vehicles this year. What is the state of fundraising in opportunistic credit like currently? Is there still a big investor appetite?

Yes, there definitely is growing investor interest and we are seeing more engagement than even a year ago. There is increasing awareness of the opportunity in capital solutions, private markets distressed debt, and asset-based credit strategies. Relative to early 2023, the pendulum has swung in this direction because the “regular way” parts of the private credit market have reverted to historical norms from a spread perspective.

3. What are the biggest areas for growth in opportunistic private credit this coming year and beyond?

Looking ahead we expect there to be a growing need for capital that is being provided to existing portfolio companies in existing funds that need a solution to extend their runway and create opportunities to maximize value for their sponsor owners. Over the past two years we have had a series of macro-driven events, from interest rate increases to geopolitical events that companies and portfolios have faced within a compressed time frame. These effects are still being worked through portfolios and in some cases have caused hold periods of portfolio companies to be longer than originally anticipated. Therefore, owners will likely need more time and capital to effectuate value creation and value maximization.

4. How does the entry of non-traditional players into the space — like hedge funds — change the dynamic, if at all?

Hedge funds actually have been doing this for a long time, but they are now seeing that there is a material  benefit to having “locked up” capital to fund these strategies versus historically implementing via side cars to better match assets and liabilities. They are now more explicitly and formally participating in private markets even though they have always done it. Because of this I don’t see a significant change in the dynamic.

5. Given the amount of dry powder in the market, it seems like private credit is converging with distressed markets to provide sponsors yet another capital solution. That’s begun to cause more tensions between the syndicated players in the space and private credit lenders. How do you imagine these dynamics changing?

The flow of capital into private credit gives borrowers more optionality. The “covenant lite” nature of the syndicated market allows borrowers to kick the can down the road and reduces the supply of classic distressed opportunities. There is also a lot of “new age” technology in the credit agreements that allow some of these over-leveraged companies to meander along. This is a big change relative to 12 to 15 years ago in terms of how distressed market opportunities evolve.

6. Has there been a material change in debt structures in the last couple years? Do you anticipate further changes next year?

The biggest change in debt structures has been the provision of more payment in kind or “PIK” flexibility. The rationale for that is to create more cash flow runway. This is typically a short-term band aid except in some hybrid capital solutions where the PIK feature is a driver of the security’s total return.

7. If the economy normalizes somewhat, and the strain on companies dissipates, how will the need for opportunistic credit capital in the market change?

In my view, I don’t think we will go back to near zero interest rates any time soon. Between anticipated increases in fiscal spending and things like supply chain re-wiring and increased reshoring, my view is that rates will settle lower than where we are currently, but higher than the 2010 to 2021 levels. In conjunction with the potential for higher volatility, I believe that the medium-term outlook for structured/opportunistic capital is quite strong.

8. What are some of the key things the market can expect in opportunistic credit in 2025?

The markets appear to be quite optimistic post-election.  In my view, when these periods of optimism abound there tend to be events, whether macroeconomic, geopolitical or otherwise, that tend to pull things back from time to time.

We expect that next year will be about haves and have nots We will likely see a bifurcation between companies and sectors that can access capital on favorable terms and orphans that cannot. Certain funds will be able to raise and deploy capital and others will not.

9. What were your top 5 artists in your Spotify wrapped this year?

French Jazz, Metallica, Michael Kiwanuka, Fleetwood Mac, Dua Lipa

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9Questions — Ashwin Krishnan, Morgan Stanley — Opportunistic credit finds itself in the LP spotlight

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