Let’s talk private credit: An expert insight with Randy Schwimmer, Churchill Asset Management

Last week, Randy Schwimmer took the stage at SuperReturn Private Credit US 2023. Read on to get his expert insight with this Q&A that addresses private credit in difficult macroeconomic environments, opportunities, challenges and the future. Also, discover his latest insights with an exclusive onsite interview, continue scrolling to find out more!

What are the key considerations for private debt in a difficult macroeconomic environment?

It’s important to understand all private debt is not the same. The term encompasses venture debt, asset-backed, distressed, mezzanine, non-sponsored, small caps, and opportunistic finance. Direct lending is traditional middle market debt – senior and junior – with private equity backed companies between $10 million and $100 million of Ebitda.

For investors, past cycles included dramatic changes in growth, interest rates, inflation, geopolitical risks, financial system risks, and pandemics. These have caused volatility in asset prices, retreat of market liquidity, and higher default risk among borrowers. To cushion against these risks, private debt managers have built portfolios diversified by industry and commitment size. They have also focused on more conservative capital structures to accommodate unexpected changes in economic or market climates.

Finally, these managers target the best performing businesses with leading market positions and strong free-cash flow generation to provide protection in recessions or market shocks.

Which industries do you see opportunities in the private credit market?

We focus on defensive sectors such as financial and business services, healthcare, technology, software, distribution and specialty manufacturing. We like sub-sectors such as commercial landscapers and insurance brokers that perform consistently through different cycles. We avoid energy, housing, commodities, retail, and high-end consumer.

Finally, we seek out top performing companies whose management teams and private equity owners have experience in the space and flexible growth plans in case market conditions prove challenging.

“Private credit market greeting investors in the tail-end of 2023 offers some of the most attractive dynamics in years.”
What is your take on the above statement, do you agree? What strategies can managers use to take advantage of this market?

The breadth and quality of opportunities in 2022, 2023, and likely 2024 will represent excellent vintages for private credit. Higher rates have increased all-in returns, including higher spreads on a record level SOFR. At the same time, leverage has declined to maintain reasonable interest and fixed coverage ratios. Private equity sponsors have increased their level of cash equity as a percent of capital in buyouts with purchase price multiples for better properties still close to historic highs. Finally, terms such as Ebitda definitions and debt baskets for middle market borrowers have tilted in favor of investors.

For managers with relationships and scale, this market presents unique opportunities. With public credit markets off-line most of 2023, sponsors have sought financing solutions for their LBOs in the private markets. Top managers such as Churchill can commit and hold $500 million per deal or more, which reaches well into the upper ranges of the middle market. This eliminates both price and execution uncertainties still present in broadly syndicated loans.

There are also advantages to offering private debt solutions up-and-down the balance sheet. Our multi-pronged capital tool kit allows us to commit senior debt, junior capital, equity co-investments, and hybrid PIK-toggle securities, even in the same transaction. Additionally, we can provide clients with refinancing options for their fund structures, including liquidity for LP and GP stakes.

Even in volatile markets, private credit continues to thrive and increases market share. How do you expect private credit to grow in the future?

We recently saw one large asset manager predict private credit would grow to $3.5 trillion by 2028. This is one of the fastest projected trajectories out there. Regardless, there are many reasons to expect the torrid historical pace to continue.

Many of the drivers of investor demand for private credit have only accelerated. The Fed’s QT and rate hikes have accentuated market volatility and asset correlation. Last year’s severe devaluations in both fixed income and equities compelled investors to expand their allocations to alternatives such as real assets and private credit.

As we saw this past March, bank’s asset/liability models were challenged, bringing their risk assessments into question. This puts the spotlight on more stable, long-term capital supporting private debt.

It’s also true that similar growth in recent years of private equity fundraising has left plenty of dry powder for new buyouts. That has provided an on-going supply of lending opportunities for private credit managers. Not to mention the significant maturity cliff of existing loans coming due over the next several years.

Private debt’s proven track record of performance since the GFC has fed much of the appetite for the asset class. Now in a much different rate environment, we expect private debt to be tested in its role as an all-weather alternative. The best managers will survive and thrive with their ability to think through and offer creative solutions to complicated credit situations. And private debt will continue to evolve, diversifying beyond institutional investors into wealth and retail channels.

All this points to what we believe is a new paradigm for this fastest growing part of the capital markets. Its adaptability amid all the market unknowns will serve investors and issuers well in the years ahead.

Want to hear more? Watch Randy Schwimmer's exclusive onsite interview, as he discusses the current lending landscape, emerging trends, fintech and risk assessment! To register for next years event, head here >>