Name: Analyst insights: How are rising interest rates affecting portfolio development?
Uploaded: 2024-04-10T11:45:56.582Z
Duration: 140.4

Rachel McGovern _SR.mp4

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Rachel.vtt

English

{{00:00:05}}
Marco Busca, I'm the head of Indirect
Private Debt, General Asset Management.

{{00:00:18}}
Absolutely, we have been through a
tremendous, terrific growth in the

{{00:00:21}}
last decade, but personally speaking,
I don't really the definition of

{{00:00:26}}
golden age for a couple of reasons.

{{00:00:28}}
One is because if you are a good and
smart investor, you can find good

{{00:00:32}}
opportunities to make great returns
in every type of market cycle.

{{00:00:35}}
It's just a matter of timing,
efforts, a little bit of luck,

{{00:00:40}}
and for also competencies.

{{00:00:44}}
But secondly, what is most important
is that the shiny part, the golden part

{{00:00:49}}
in the last 18 months has just been the
raise of the spreads alongside with the

{{00:00:53}}
base rate, but on the other side, which
make greater return from investment.

{{00:00:58}}
On the other side, it was clear that there
was a decrease in terms of development.

{{00:01:02}}
Comparing to the previous vintage,
there has been a 30 percent decrease.

{{00:01:05}}
in terms of deployment.

{{00:01:07}}
So for an investor, there
has been this trade off.

{{00:01:10}}
Greater return, lower deployment.

{{00:01:12}}
What is happening in 2024, what we
are already seeing, is that there

{{00:01:15}}
is an inversion of this trend.

{{00:01:17}}
The deployment is growing because
the M& A activity is revitalizing.

{{00:01:22}}
On the other hand, the spreads
are compressing a little bit.

{{00:01:24}}
They're tightening up because there is
more competition between fund managers.

{{00:01:28}}
And also there are some banks
that are waking up in the space.

{{00:01:32}}
What we are really careful about, not
concerned, careful is about the potential

{{00:01:38}}
defaults that we will see in the market,
especially until the credit conditions

{{00:01:41}}
are so high in terms of interest rates.

{{00:01:44}}
But with our fund manager selection, we
So we have a management special, we try

{{00:01:49}}
to look for best in class managers that
have good expertise in restructuring, but

{{00:01:54}}
for sure also did a good underwriting.

{{00:02:02}}
Yeah, absolutely.

{{00:02:03}}
Obviously, we are trying to create
a diversified and compelling

{{00:02:06}}
portfolio for our funder fund,
but we have a few priorities.

{{00:02:09}}
The first priority is credit
opportunities, obviously, because, as

{{00:02:12}}
I said before, we are in an economic
cycle with high inflation, high rates.

{{00:02:17}}
So there could be, the appearance that
there are already some cases happening

{{00:02:21}}
of good companies with bad balance
sheet that requires ad hoc financing.

{{00:02:25}}
So we're really looking to invest in
funds that are capable to take these

{{00:02:29}}
opportunities to finance idiosyncratic
situation or complex tracks or complex

{{00:02:35}}
The second focus that we'll have is
the new trend of asset based lending

{{00:02:40}}
because there has been for longer,
real estate and infrastructure debt.

{{00:02:45}}
Obviously, the core portfolio will remain
the senior secure corporate cash for

{{00:02:49}}
lending, but there is this new trend in
which investors through funds invest in

{{00:02:54}}
real assets that can be financed to real
assets that can be guaranteed by tangible

{{00:02:59}}
assets like ships, aircraft, receivables,
or intangibles, royalties litigation.

{{00:03:06}}
With our fund to fund, we create a
compartment to invest in this space,

{{00:03:10}}
in the asset based lending space.

{{00:03:11}}
The third, which is the most, probably
the one that had the greatest growth

{{00:03:17}}
in the last year is the private credit
secondaries, which, for an investor, has

{{00:03:21}}
very interesting returns, double digit.

{{00:03:24}}
What we are really looking at is if
these flows, remains constant, if

{{00:03:30}}
it has been just a temporary trend,
or if there will be a consolidated

{{00:03:34}}
flow in terms of secondaries.

{{00:03:35}}
But we are ready to jump on this
trend too, with our fund selection.

{{00:03:46}}
Yeah, absolutely.

{{00:03:46}}
As I said before the first things
which we are careful at is the

{{00:03:52}}
resilience of our portfolio.

{{00:03:53}}
Every macro analyst, This is discussing
about hard lending, soft lending, or

{{00:03:57}}
lending we're really looking at if
there will be defaults in our portfolio,

{{00:04:01}}
how the manager will restructure the
position, how the portfolio will cope

{{00:04:05}}
with this new credit environment.

{{00:04:08}}
The second potential challenge is
the intervention of the regulator.

{{00:04:13}}
There has been ongoing discussion
on potential limit to the

{{00:04:17}}
leverage, potential retention.

{{00:04:19}}
What I want to say is that
private debt was born.

{{00:04:24}}
Following the need of more flexibility
to the market because after the great

{{00:04:30}}
financial crisis with the new regulation,
there has been the spread of private

{{00:04:34}}
debt to substitute the exit of the
banks from the financing so that it

{{00:04:40}}
being the limiting the flexibility
of private debt could jeopardize the

{{00:04:44}}
beneficial role of the private debt.

{{00:04:46}}
And finally, the.

{{00:04:47}}
Third, not challenge, but thing
that we are closely look is the

{{00:04:50}}
democratization of the private debt.

{{00:04:52}}
All these products that are addressing
to the retail, investors that

{{00:04:58}}
need to be disclosed carefully.

{{00:05:00}}
I'm not totally against these
semi liquid private funds, but

{{00:05:03}}
just a matter of marketing.

{{00:05:05}}
We need to be careful of disclosing
the liquidity characteristic of this

{{00:05:09}}
product in order that there are not bad
surprises in cases of massive sell off

{{00:05:14}}
due to whatever type of, difficult event.

{{00:05:29}}
Hi, my name is Rachel McGovern.

{{00:05:30}}
I'm a Senior Director with KBRA Analytics,
the Direct Lending Deals product.

{{00:05:42}}
So essentially what you saw over the
last 18 months was the traditional

{{00:05:46}}
sources of leverage finance,
debt, capital, essentially dried

{{00:05:51}}
up, all but completely shuttered.

{{00:05:53}}
Private credit stepped
in to fill that void.

{{00:05:56}}
So we track deals and deal volumes and in
that larger cap space of deals that are

{{00:06:02}}
over $1 billion in value in Europe, we
went from about 6 billion issued in 2022

{{00:06:09}}
to 22 billion being issued across 2023.

{{00:06:12}}
That's a 218% increase.

{{00:06:15}}
It's been a massive shift of capital
coming from the traditional markets.

{{00:06:20}}
Now coming from the direct
lending market specifically.

{{00:06:24}}
And banks being cut out of fees and direct
lenders capitalizing on all of that.

{{00:06:37}}
Portfolios are obviously, the yields
are fantastic, investors are getting

{{00:06:42}}
a lot of money, but much of that has
come from the base rate increases.

{{00:06:46}}
That puts a lot of pressure on
borrowers in terms of having

{{00:06:50}}
to pay more for that debt.

{{00:06:53}}
That in turn puts pressure on their
cash flows, and if the borrower

{{00:06:56}}
is, say, overleveraged, or they've
had some performance issues, they

{{00:07:00}}
struggle to meet those repayments.

{{00:07:02}}
But when we look actually at portfolios
in the direct lending market,

{{00:07:06}}
they're holding up pretty well.

{{00:07:07}}
A 2022 default rate for direct
lending in the US market was 2.

{{00:07:11}}
2 by issuer count.

{{00:07:14}}
That compared to 4.

{{00:07:16}}
8 and, sorry, 4 percent and 5.

{{00:07:19}}
8 percent for the high yield
bond and syndicated loan markets.

{{00:07:25}}
We'll see how much longer borrowers
can sustain those high levels.

{{00:07:29}}
The amount of debt that they can
borrow will go down, leverage

{{00:07:33}}
will be moderate but so far, so
good in terms of default rates.

Marco Busca, I'm the head of Indirect
Private Debt, General Asset Management.

Absolutely, we have been through a
tremendous, terrific growth in the

last decade, but personally speaking,
I don't really the definition of

One is because if you are a good and
smart investor, you can find good

opportunities to make great returns
in every type of market cycle.

It's just a matter of timing,
efforts, a little bit of luck,

But secondly, what is most important
is that the shiny part, the golden part

in the last 18 months has just been the
raise of the spreads alongside with the

base rate, but on the other side, which
make greater return from investment.

On the other side, it was clear that there
was a decrease in terms of development.

Comparing to the previous vintage,
there has been a 30 percent decrease.

So for an investor, there
has been this trade off.

What is happening in 2024, what we
are already seeing, is that there

The deployment is growing because
the M& A activity is revitalizing.

On the other hand, the spreads
are compressing a little bit.

They're tightening up because there is
more competition between fund managers.

And also there are some banks
that are waking up in the space.

What we are really careful about, not
concerned, careful is about the potential

defaults that we will see in the market,
especially until the credit conditions

But with our fund manager selection, we
So we have a management special, we try

to look for best in class managers that
have good expertise in restructuring, but

Obviously, we are trying to create
a diversified and compelling

portfolio for our funder fund,
but we have a few priorities.

The first priority is credit
opportunities, obviously, because, as

I said before, we are in an economic
cycle with high inflation, high rates.

So there could be, the appearance that
there are already some cases happening

of good companies with bad balance
sheet that requires ad hoc financing.

So we're really looking to invest in
funds that are capable to take these

opportunities to finance idiosyncratic
situation or complex tracks or complex

The second focus that we'll have is
the new trend of asset based lending

because there has been for longer,
real estate and infrastructure debt.

Obviously, the core portfolio will remain
the senior secure corporate cash for

lending, but there is this new trend in
which investors through funds invest in

real assets that can be financed to real
assets that can be guaranteed by tangible

assets like ships, aircraft, receivables,
or intangibles, royalties litigation.

With our fund to fund, we create a
compartment to invest in this space,

The third, which is the most, probably
the one that had the greatest growth

in the last year is the private credit
secondaries, which, for an investor, has

What we are really looking at is if
these flows, remains constant, if

it has been just a temporary trend,
or if there will be a consolidated

But we are ready to jump on this
trend too, with our fund selection.

As I said before the first things
which we are careful at is the

Every macro analyst, This is discussing
about hard lending, soft lending, or

lending we're really looking at if
there will be defaults in our portfolio,

how the manager will restructure the
position, how the portfolio will cope

The second potential challenge is
the intervention of the regulator.

There has been ongoing discussion
on potential limit to the

What I want to say is that
private debt was born.

Following the need of more flexibility
to the market because after the great

financial crisis with the new regulation,
there has been the spread of private

debt to substitute the exit of the
banks from the financing so that it

being the limiting the flexibility
of private debt could jeopardize the

Third, not challenge, but thing
that we are closely look is the

All these products that are addressing
to the retail, investors that

I'm not totally against these
semi liquid private funds, but

We need to be careful of disclosing
the liquidity characteristic of this

product in order that there are not bad
surprises in cases of massive sell off

due to whatever type of, difficult event.

I'm a Senior Director with KBRA Analytics,
the Direct Lending Deals product.

So essentially what you saw over the
last 18 months was the traditional

sources of leverage finance,
debt, capital, essentially dried

Private credit stepped
in to fill that void.

So we track deals and deal volumes and in
that larger cap space of deals that are

over $1 billion in value in Europe, we
went from about 6 billion issued in 2022

It's been a massive shift of capital
coming from the traditional markets.

Now coming from the direct
lending market specifically.

And banks being cut out of fees and direct
lenders capitalizing on all of that.

Portfolios are obviously, the yields
are fantastic, investors are getting

a lot of money, but much of that has
come from the base rate increases.

That puts a lot of pressure on
borrowers in terms of having

That in turn puts pressure on their
cash flows, and if the borrower

is, say, overleveraged, or they've
had some performance issues, they

But when we look actually at portfolios
in the direct lending market,

Expert Insight

Join us for an insightful discussion with Rachel McGovern, Senior Director at KBRA Analytics, as she shares her expertise on the evolving financial landscape amidst changing market dynamics. In this interview, Rachel will shed light on two key areas: the impact of high interest rates on portfolio growth and development, and the transformation of the direct lending market in response to market dislocation.