Despite fears over macroeconomic volatility and uncertainty, private credit firms could be set to benefit as widening spreads and improved pricing begin to emerge in the US, according to Zia Uddin (pictured), president at Monroe Capital.
Speaking to Alternative Credit Investor, Uddin, of the $24bn ($17.9bn) Chicago-headquartered Monroe Capital, acknowledged the uncertainty and volatility currently affecting markets. A lot of this driven by geopolitical tensions in the Middle East, which have fuelled energy price fluctuations and inflation concerns.
He explained that despite the alternative credit manager typically being insulated from broader macroeconomic headwinds such as foreign supply chain disruption and foreign exchange risk, the current environment is not unfamiliar, pointing to previous periods including the Covid-19 pandemic.
During times of uncertainty, direct lenders are better positioned to dictate terms, benefiting from wider spreads, improved pricing and enhanced fee structures, Uddin said.
“We have seen similar lender-favourable environments in the past, and we are beginning to see those conditions re-emerge with spreads widening,” he said. “I expect that trend to continue. Geopolitical events, along with upcoming midterm elections, often create attractive opportunities for private credit investors.”
“There is a significant amount of price discovery currently taking place across the market,” he added.
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However, managers have told ACI that current market uncertainty is making fundraising more challenging, with new investors hesitant about entering the asset class as a result of volatility.
Adding to these concerns, private credit’s exposure to software companies and fears around the disruptive impact of artificial intelligence (AI) on the sector have already weighed on US business development companies (BDCs).
Addressing the current market jitters around software, Uddin said there remains a “meaningful opportunity in software, but selectivity is critical”.
“The environment has shifted away from a ‘rising tide lifts all ships’ dynamic [towards software],” he said.
“I believe AI is one of the most transformative developments of my lifetime; however, it does not imply that an entire asset class will be displaced. There will be both winners and losers.”
Uddin explained that the private credit industry will continue to “remain a multi-trillion-dollar market”, despite software jitters and recent redemptions in BDCs, adding that institutional investors continue to allocate capital to private credit.
“Much of the movement in BDCs appears to be driven more by market narrative than by underlying fundamentals,” he said, cautioning that the impact of recent events in the US wealth market is still uncertain.
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Overall, Uddin stressed a positive outlook for the private credit asset class, expecting spreads to continue widening across the space, along with greater dispersion in manager performance.
“The era of easy beta is likely behind us,” he acknowledged, but looking forward “it will be interesting to see how retail capital ultimately factors into this [private credit] landscape”.
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