The next phase for private credit markets as COVID-related headwinds dissipate in 2022
Credit selection at all times is important, but in a period of rising rates it will be critical. Ahead of SuperReturn International 2022, hear from key speaker David Allen, Managing Partner & CIO at AlbaCore Capital Group, on the next phase for private credit markets. Find out how AlbaCore are positioning for Alpha and the Three-C’s Investment Process they use to construct their portfolio.
When one door closes, another one opens. COVID related headwinds have subsided as we make our way through 2022, though residual COVID impacts are present in global supply chain disruption, inflationary pressures, and policy response uncertainty. Future political risks in the developed world linger as electorates, fatigued by two years of on-and-off restrictions, seek change. Other risks, some foreseen (like inflation and higher rates) and some less foreseeable (war in Ukraine) have stepped in as key risk factors for investor consideration.
Current Market Reflections
In the case of higher rates we anticipate this will continue to weigh on traditional fixed income investments, especially longer duration investment grade corporate risk. Higher rates have also dented equity valuation multiples, still lofty by historical measures. Concerns around the potential for recession have resurfaced, as investors evaluate whether central banks can engineer a soft landing in attempting to tap the brakes on economies with inflation running at the highest rate in decades. Conflict in Ukraine presents an entirely different set of circumstances and risks, which are more quantifiable in some respects, than trying to underwrite the severity and depth of COVID in 2020.
Traditional private credit offers many attractive features like a bias towards senior risk and floating rate structures, which are attractive safe havens relative to the traditional safe havens of investment grade and sovereign debt, as they should provide protection if defaults pick up and as rates rise. We have seen repeatedly in the past several years, windows of opportunity open, sometimes only very briefly, so being more flexible in your approach to credit investing, and looking for ways to unlock complex opportunities, can create significant value over the long term for investors. We therefore maintain that preparation is key, and proactively underwriting the investable universe for potential market dislocations is essential.
Positioning for Alpha
While the window of dislocation in February/March was short-lived, that period allowed us to refresh our views on significant portions of the investible European credit landscape. We feel prepared in the event of future or more severe dislocations, that may arise in 2022.
We are taking a cautious approach to opportunities in the current market, but are unafraid to underwrite risk with attractive risk-adjusted returns and convexity. Our flexible and fundamental approach should enable us to continue making interesting investments throughout the year irrespective of what is behind the next door. Two primary facets of AlbaCore’s investing style give us comfort in these uncertain times: our granular and bottom up approach to credit review, and also the ability to be agile across the corporate credit spectrum.
At the core of our approach is fundamental credit underwriting. Credit selection at all times is important, but in a period of rising rates it will be critical as defaults are likely to proliferate as companies’ cost of financing increases. Our Three-C’s Investment Process, which focuses on Credit, Convexity and Catalysts, including our integrated ESG approach inherently filters out companies and sectors which we feel are higher risk, enabling us to more carefully underwrite and monitor the credits we do know and favour. Our investment team applies a private investment skillset to public markets, which we believe gives us an edge in how we construct our portfolio and choose our risks.
The flexibility of our mandate allows us to pivot to where we see the best relative value in credit markets. For the last four months of 2021, we were focused primarily on opportunities in private credit markets. After this period of relative inactivity in public markets, a brief window in late February and early March provided some attractive opportunities in short-dated senior secured risk trading in the low 90’s. Similarly, the disruption in the leveraged loan primary market created attractive pricing dynamics for primary single-B and double-BB rated CLO debt tranches. The lack of functioning capital markets in the first quarter of this year has also pushed some previously anticipated public credit deals into the private markets, where we were able to negotiate attractive terms on a relative value basis. We are engaged with some companies that expected IPOs in 2022, but due to current market conditions are re-evaluating and structuring attractive deals that offer both attractive contractual return, and upside convexity. In periods of market stress, companies will often trade spread and terms for certainty of execution and the ability to look holistically across the market for value we see to be essential.
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Under the spotlight: David Allen
Mr. Allen has in excess of 30 years of financial services and investment experience, with a focus on the High Yield and Leveraged Finance Markets. Prior to founding AlbaCore Capital Group, Mr. Allen managed Canada Pension Plan Investment Board’s European Principal Credit Fund and was a member of the Investment Committee. Mr. Allen was also a Partner, Investment Committee member and Senior Portfolio Manager at GoldenTree Asset Management, where he established and ran the firm’s European presence. Mr. Allen spent a decade with Morgan Stanley in New York and Hong Kong, working across M&A and investment banking before specialising as a High Yield media analyst.
To hear more insights from David Allen and other industry leaders, join us at SuperReturn International 2022 >>