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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.
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Endnotes
All information is as of 31 DEC 2021 unless otherwise noted.
The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Past performance is no guarantee of future results. Investing involves risk; principal loss is possible.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. For term definitions and index descriptions, please access the glossary on nuveen.com. Please note, it is not possible to invest directly in an index.
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.
Investments in middle market loans are subject to certain risks. Please consider all risks carefully prior to investing in any particular strategy. These investments are subject to credit risk and potentially limited liquidity, as well as interest rate risk, currency risk, prepayment and extension risk, inflation risk, and risk of capital loss.
Nuveen provides investment advisory services through its investment specialists.
Churchill Asset Management is a registered investment advisor and an affiliate of Nuveen, LLC. This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy, sell or hold a security or an investment strategy, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Financial professionals should independently evaluate the risks associated with products or services and exercise independent judgment with respect to their clients.
