Higher interest rates will create attractive opportunities for disciplined private credit lenders, despite the “growing pains” facing the sector, Man Group‘s head of U.S. direct lending has told CNBC.
Speaking with CNBC at the SuperReturn International private equity and venture capital conference in Berlin, chief investment officer Kevin Marchetti said credit fundamentals remain strong in the core middle market direct lending space in the U.S.
He was speaking the week after Blackstone said it was capping withdrawals from its flagship fund following a spike in redemption requests, and Switzerland’s Partners Group revealed it may curb capital withdrawals across several of its vehicles.
London-listed global alternative investment giant Man Group’s private credit business focuses on sponsor-backed deals in recession-resilient end markets, Marchetti said, where underlying default rates, losses and non-accruals are operating “well below” long-term averages.
“When you overlay that with tight financial covenants, which we have today, tight legal documentation, and good institutional ownership, I think what we’re seeing is an attractive relative value opportunity in our core sector,” Marchetti told CNBC’s Annette Weisbach.
The firm remains “laser focused” on how soaring energy costs and the prospect of higher inflation and interest rates in the U.S. are impacting the underlying portfolio companies in private credit funds.
“With inflation as it is, you have a likely higher-for-longer interest rate environment they’re going to operate in, that will drive, I think, a more attractive yield on these businesses,” Marchetti added.
U.S. annual inflation jumped above 4% to its highest level in three years on Wednesday. The consumer price index topped 4.2% in May, up from 3.8% in April, putting the prospect of Federal Reserve rate hikes back in the frame.
“Everything we do in the core middle market direct lending place is floating rate, so with benchmarks being higher, that’ll drive a more attractive yield on those underlying assets that we finance,” Marchetti said.
Liquidity pressures remain a live risk
Blackstone and Partners Group capping withdrawals has reignited fears over liquidity pressures in certain private credit structures aimed at retail investors.
Marchetti said this pocket of capital ultimately did not fully appreciate the illiquid nature of the underlying assets that were being financed.
“I chalk it up to growing pains of the asset class,” he added.
Man Group.
He said the interest rate environment and overall liquidity remain a live risk.
“In deals that were underwritten two and three years ago, when we were operating in a zero interest rate environment, are those capital structures sustainable, and can those companies cover their debt service in the environment we’re in today?” he added.
“Then it’s fundamental credit performance. With the amount of capital that came into the private credit space over the last 10 years, there was a rush to deploy across certain managers.
“That drives that portfolio construction — did you change your underwriting guidelines or principles to get deployment? I think that’s where you’re going to see the dispersion in performance.”
