Unlocking the Power of Private Credit
Text on screen: Unlocking the Power of Private Credit
Text on screen: Lalantika Medema, Product Strategist
Private credit often refers to non-bank lending, whereby loans are made directly to companies or borrowers.
The growth in private credit has come from both the supply and demand side. With respect to supply (or credit availability), the driving factors of growth include regulations and bank retrenchment. As traditional lenders have pulled back, its created an opportunity for private capital to step in with more control over the terms and profile of capital provided.
On the demand side, client allocations to private credit have increased. Private credit can serve as a complement to traditional fixed income and private equity exposures.
Historically, private credit has often referred to corporate direct lending. At PIMCO, we look at private credit across corporate, commercial, residential and specialty finance markets.
Our highest conviction areas in private credit include speciality finance, which is also known as asset based lending, as well as more capital solutions oriented opportunities in corporate credit.
We are transitioning from an environment of low rates and massive liquidity to one of higher rates and strained liquidity. We believe this will result in opportunities for flexible capital in speciality finance and corporate markets.
We like this asset class for several reasons including shorter weighted average lives -- given that you’re getting principal and interest cash flows -- downside protection -- given that you have hard asset coverage -- and diversification, often a complement to that traditional corporate direct lending exposure).
On the corporate side, bank retrenchment coupled with regional banking pressures has continued to result in opportunities for more bespoke private lending investments.
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Disclosure
Past performance is not a guarantee or reliable indicator of future results.
Alternative investments involve a high degree of risk and can be illiquid due to restrictions on transfer and lack of a secondary trading market. They can be highly leveraged, speculative and volatile, and an investor could lose all or a substantial amount of an investment. Alternative investments may lack transparency as to share price, valuation and portfolio holdings. Complex tax structures often result in delayed tax reporting. Compared to mutual funds, private funds are subject to less regulation and often charge higher fees. Alternative investment managers typically exercise broad investment discretion and may apply similar strategies across multiple investment vehicles, resulting in less diversification. Trading may occur outside the United States which may pose greater risks than trading on U.S. exchanges and in U.S. or other developed markets. Private credit involves an investment in non-publically traded securities which are subject to illiquidity risk. Portfolios that invest in private credit may be leveraged and may engage in speculative investment practices that increase the risk of investment loss. Investments in Private Credit may also be subject to real estate-related risks, which include new regulatory or legislative developments, the attractiveness and location of properties, the financial condition of tenants, potential liability under environmental and other laws, as well as natural disasters and other factors beyond a manager's control. Performance could be volatile; an investor could lose all or a substantial amount of its investment. The value of real estate and portfolios that invest in real estate may fluctuate due to: losses from casualty or condemnation, changes in local and general economic conditions, supply and demand, interest rates, property tax rates, regulatory limitations on rents, zoning laws, and operating expenses. Residential or commercial mortgage loans and commercial real estate debt are subject to risks that include prepayment, delinquency, foreclosure, risks of loss, servicing risks and adverse regulatory developments, which risks may be heightened in the case of non-performing loans. Investing in distressed loans and bankrupt companies is speculative and the repayment of default obligations contains significant uncertainties. High yield, lower-rated securities involve greater risk than higher-rated securities; portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not. The use of leverage may cause a portfolio to liquidate positions when it may not be advantageous to do so to satisfy its obligations or to meet segregation requirements. Leverage, including borrowing, may cause a portfolio to be more volatile than if the portfolio had not been leveraged. Derivatives may involve certain costs and risks, such as liquidity, interest rate, market, credit, management and the risk that a position could not be closed when most advantageous. Investing in derivatives could lose more than the amount invested. Diversification does not ensure against loss. .
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