For more than a decade, both corporate and consumer borrowers benefited from low interest rates and a very low cost of capital. As the global economic backdrop continues to adjust to the activity of central banks and the uncertain geopolitical backdrop, investors are seeking ways to ensure that their portfolios are adequately positioned in order to meet their long-term risk and performance goals, write Jo Waldron and Karen Lam at M&G Investments.
Whilst historically seen as a niche asset class, investor appetite for private credit assets has grown considerably as investors seek to gain access to the asset class’s diversification benefits. As we navigate markets with our investors, we believe there are three key aspects which make the asset class attractive.
The global search for yield has seen investors consistently increasing their allocations to private and alternative credit. Today’s private credit investors remain well-compensated for taking illiquidity (read: complexity) risk and capital remains patient, but the investing backdrop is pushing alternative motivations for investing in private credit up the priority list. The broad spectrum of private credit, ranging from private corporate lending to consumer finance, real assets lending and structured credit tend to have very different underlying risks and performance drivers, which may provide opportunities for investors seeking a secure income stream.
The asset class is inherently less sensitive to the movements of global markets than traditional asset classes – most assets are model-priced helping to reduce mark-to-market volatility and are typically held until maturity. Return generation from the asset class is not contingent on long-term macroeconomic dynamics, given the prevalence of cashflow-generative assets delivering income-driven returns rather than returns predicated on market gain.
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