Full speed ahead: Private credit outlook 2022
As investment managers reflect on an incredibly productive 2021, many are now looking ahead to 2022. What will the new year bring? With a measure of caution, we present the following themes shaping our outlook for 2022:
- Activity levels. 2021 was characterized by the unleashing of pent-up private credit demand from issuers and investors, much of which was attributable to the virtues of the asset class highlighted by the pandemic: relative yield, less correlation and lower defaults. Will these benefits hold in 2022, or weaken from competitive pressures?
- Portfolio construction. In 2021, private credit portfolios in consumer-facing businesses got swept into whatever path COVID sent them. Many B2B companies overcame infection worry and rode on an economic surge. How will selectivity and diversification affect future defaults and recoveries?
- Mega-tranche trend. Disintermediation to direct lenders away from broadly syndicated loans (BSLs) accelerated in 2021. We saw a rise in vehicles that were $1 billion-plus unitranches, often with bond-like (cov-lite) covenants and high leverage. As deal sizes grow, will more paper be distributed? Will the buy side start looking like the sell side?
- Inflation and interest rates. All eyes have been on interest rates and rising inflation. Now that the Fed’s intentions have firmed, the question is simple: Will the pandemic-induced spike in prices for goods and services ease as supply/demand forces rebalance, or has COVID fundamentally changed the true cost of things? And what will higher (or lower) growth do to interest rates?
- Does ESG matter? In 2021, interest in ESG factors penetrated into every corner of the market. As a driver in both investor and manager behavior in the asset management sphere, the trend has created both opportunities and challenges. Will political pressure surrounding ESG motivate real change or defensive box-checking – so-called “greenwashing” – that is more form over substance?
What will deal activity look like in 2022? One thing is for sure, it will be hard to beat 2021.
All information is as of 31 DEC 2021 unless otherwise noted.
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A word on risk
Responsible investing incorporates Environmental Social Governance (ESG) factors that may affect exposure to issuers, sectors, industries, limiting the type and number of investment opportunities available, which could result in excluding investments that perform well.
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