Market Wrap
The Unicrunch — Private credit’s redeeming features
- Peter Benson
•4 min read
The Unicrunch is our US private credit newsletter, in which we break down everything from unitranches to ABL. Find out more about what we do for private credit.
Fund openings
As days go by, it is getting increasingly more difficult to think of private credit as a long term investment strategy.
The headlines are filled with those more typically seen in the public debt markets, with lenders taking the keys or engaging in LMEs. Just a few months ago, the stories were highlighting the stubbornly low default rate.
It’s not supposed to be this way for the self-proclaimed golden age of private credit. But here we are with the exuberance of the extra yield from higher rates now giving way to sustained cost pressures on portfolio companies.
What to make of the risks if you’re an investor? This time last year, private credit was underwriting multi-billion dollar unitranches, but now banks are having all the fun. With so much changing in just 12 months, perhaps a savvy investor may want an easy exit should things sour. And still, of course, want in as yields remain high.
The solution to that may be in the interval fund. Not a new creation, but it’s the thesis of Principal Asset Management and StepStone, who have became the latest asset managers to join the private credit party by launching an interval fund to capture wealth management capital, offering semi-liquid exposure to a traditionally illiquid asset class.
StepStone’s Private Credit Income Fund is an evergreen fund that offers quarterly liquidity similar to non-traded BDCs. A spokesperson told 9fin that the interval fund structure allows for lower investment minimums than traditional closed-ended funds which helps capture the wealth management clients.
The fund has no set target it wants to raise and has been seeded with commitments from StepStone executives, the StepStone balance sheet, and several additional investors, the spokesperson added. While most of the fund will target senior direct loans, a portion of the fund is devoted to specialty credit, including asset-backed niche corporate lending, and structured product strategies.
For Principal, its Principal Private Credit Fund I has been seeded with a $40m capital commitment that gives it access to an initial portfolio of loans across 37 issuers.
The vehicle will be sector agnostic, though will focus on commercial and professional services, tech and software, healthcare, food and beverage, and consumer staples, Tim Warrick, managing director of alternative credit, told 9fin over email.
Principal’s fund will allocate 90% of its exposure to first lien direct lending loans at the lower end of the middle market. The remainder of the fund will look to invest in treasuries, syndicated loans, and high-yield bonds. The exposure to these, along with cash, will ensure sufficient liquidity for investors, Principal’s Warrick said.
“[The core and lower middle markets have] less competition which leads to obtaining financial covenants in all direct lending loans, lower leverage, and better pricing; ultimately providing investors with attractive risk-adjusted yields and an expectation for resilient performance through market cycles,” he said.
Perhaps it’s best to not think about private credit investing over each quarter but in the long term. Yet the pace and change of markets may force some to do so. Having a greater access to liquidity in private credit is becoming a bigger question, whether it is for the lenders themselves or the large institutional investors in big closed-ended funds.
The interval fund means that the individual investor also has that same option.
Putting the squeeze on non-sponsored
The start of the year was defined by competition between banks and private credit.
As we move into the middle of the year, a slew of entrants combined with a starved M&A market has created an increased appetite but not a lot of places to satiate that hunger. The movement in non-sponsored spreads suggests some of the activity is going there.
As one private credit manager put it bluntly this week: “When you [non-sponsored] are like 5% of the market transactions on a normal basis, but there are no other transactions to do, everyone wants to focus on the 5%.”
The competition is leading to a market that typically got a juicy margin because of the extra legwork required being squeezed. Multiple sources have said that spreads have narrowed 75bps-100bps in the last few months, with some even only 25bps over the SOFR+500bps spreads that have become commonplace in core middle market deals these days.
This is certainly something to watch in the non-sponsored space as one of the benefits of playing in that space versus the regular way sponsor-backed space is a lack of competition making it more attractive. Most managers active in the space still have a brave face on in spite of the market tightening.
As one specialist non-sponsored market defended the space: “In terms of unfunded, committed dollars out there, demand outstrips supply. Even if all of the unfunded capital [targeting non-sponsored deals] got drawn down from what’s been raised, we’d still be structurally short capital.”
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