The convergence of public and private credit is set to create challenges for the industry, as lines increasingly blur between the different asset classes.
There are a few different dynamics at play. One part of the convergence is resulting in syndicated loans and direct lending at the upper end of the market starting to look very similar in terms of how they are structured and the terms – something analysts at Moody’s previously warned about.
The other side is the inclusion of both public and private credit in portfolios aimed at retail or private wealth investors.
“People are moving to expand their patches and you’re getting a mix of different products,” said Patrick Marshall, head of private credit at Federated Hermes.
“You’re getting more syndicated loans being put in funds, the terms of larger cap direct lenders are becoming increasingly standardised and more bond-like, so in effect, you’re moving towards a wider fixed income market, of which private debt is now a key component.”
He added that some managers are in effect becoming fixed income managers.
Case in point, PGIM recently announced that it would be combining its public and private credit arms into a $1tn (£0.74tn) unit.
Marshall said that where publicly traded loans and private credit are becoming more similar is at the larger end of the mid-market. But as investors look to different structures, such as semi-liquid funds, managers will need to put instruments in those strategies to allow them to have some form of liquidity and therefore there may be pressure on the lower mid-market as well.
“However, the lower mid-market does remain a primarily banking market, and I think that investors who are investing in the lower mid-market know that if you want an illiquidity premium, you do have to have an element of illiquidity,” he added. “Having said that, we are still seeing pressure arising.”
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He also noted that if the convergence continues, there will be a greater regulatory spotlight on private credit. But he believes that it is not likely that there will ever be a situation where lower mid-market loans are traded, because they are too small.
“If [semi-liquid funds] can’t deploy fast enough, they’ll put more liquid assets in there, and that’s where you’re going to get that convergence,” he added. “As these products become more popular, it won’t just be lower mid-market loans, there’ll be other types of fixed income products that go into the fund. Then the issue is, what is the investor really getting?”
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Meanwhile, the convergence of the two markets is creating a talent gap that is putting pressure on recruitment.
Skye Lucas, director – investment management at Selby Jennings, told Alternative Credit Investor that the intersection of the two sectors is paving the way for new career trajectories as firms look to hire talent that “combines the speed and liquidity mindset of public markets with the structuring skills of private lending.”
She said that there is growing demand for candidates who can navigate both liquid credit markets and private lending as managers build out hybrid strategies, but these are in short supply.
“Firms want talent with a mix of skills: public market savvy, private credit underwriting proficiency, and a deep understanding of how syndicated deals and custom transactions come together,” she added.
“These firms are focused on multi-asset professionals who are capable of analysing, underwriting, and investing across the full capital structure and liquidity spectrum. They are looking for fluency in credit underwriting across structures, complex deal experience, advanced financial modelling, relative value and market awareness, and a deep understanding of the full capital structure.”
