Private credit leaders have shaken off the software sell-off and ‘cockroach’ fears, instead highlighting fiscal policy as their primary concern in Europe.
At the Phoenix Group Investment Forum earlier today, senior private credit executives appeared unfazed by mounting criticism facing the asset class.
It emerged earlier this week that business development companies with exposure to the software sector had experienced a sell-off, driven by concerns about the potential threat that artificial intelligence (AI) poses to software businesses.
Speakers at insurer Phoenix Group’s event stated that they were not worried about recent movements, with software representing a unique sector within private credit.
They emphasised that they are actively re-underwriting the business models of software companies and that many private credit funds have chosen to avoid unsuitable industries.
“We recognise that some [software companies] will require a little more handling to help them succeed. You want them to success as that is how we get our capital back,” one industry leader said.
Read more: ‘Cockroach’ fears overblown after Tricolor and First Brands fallout
Cockroaches
The discussion also addressed lingering ‘cockroach’ fears following the bankruptcies of US auto parts supplier First Brands and car dealership Tricolor. Such events prompted figures including JP Morgan chief executive Jamie Dimon to suggest they may indicate deeper stress within private credit.
Nonetheless, one panellist noted that they are not “seeing the wave of defaults that everyone was expecting”.
Another remarked that when you are making sub-investment grade loans, there will always be a risk of defaults, but it is their job to ensure no money is lost.
Fiscal challenges
Indeed, the leaders suggested that the primary concern for private credit going forward is fiscal policy.
Each government is taking a different path: Germany is spending heavily, France is constrained, and the UK is a headache, one industry stakeholder said.
“Governments need to spend more”, a speaker remarked, “but they are constrained by debt-to-GDP ratios at their highest levels since the Second World War.”
As a result, a significant portion of capital will need to originate from the private sector, the speaker added.
Participants also welcomed the Bank of England’s “system-wide exploratory scenario” testing, noting that stress testing is already embedded in their day-to-day operations.
“We reconstruct portfolios continuously,” one said. “It is not a hypothetical exercise; we already have that data.”
Another panellist added: “What we want to be clearer ‘rules of the road’, because where the noise comes in is from those on the margins who might not be as disciplined.”
