RECAP: 2018 FOX Autumn Global Investment Forum

Opportunities in Private Credit

 

Moderator:
Tod Trabocco, CFA, Managing Director, Cambridge Associates, LLC 

Panelists:
Daniel Pound, Managing Director, Angelo, Gordon & Co.
Michael Smith, Partner, Co-Head of Credit Group, Ares Management, L.P. 

Session Description: 

In this session, we discussed where we are in the credit cycle and how to consider opportunities in private credit, focusing on direct lending and distressed debt. Cambridge's Head of Private Credit Research moderated the discussion and portfolio managers from Angelo, Gordon & Co. and Ares Management discussed credit strategies broadly, with a focus on their direct lending and distressed strategies, as well as other timely opportunities.

Key Takeaways: 

  • Past fundraising:  New entrants to the direct lending space and total assets raised have increased dramatically post 2008-2009 crisis, with a meaningful step up in the 2013-2017 period while 2018-to-date has seen a pace notably less than 2017.   

  • Future fundraising:  The number of active direct lending funds is likely to remain relatively static and the growth in assets have and will level off.   

  • Direct lending is typically an all-weather strategy but note that managers with cash reserves will be the winners as they will have dry power late in the cycle to take advantage of opportunities.  The key will be to find managers that can find good companies with bad capital structures offering a good entry price.   Retail was highlighted as a sector that is particularly challenged.  

    • As interest rates rise in the U.S., the number of defaults will increase (with a significant lag of 12-18 months) as rates are still low compared to historical averages.  

    • In Europe, companies are not as healthy as in the U.S. (The European Central Bank owns 20% of investment grade corporate credit).  

  • Factors to consider when selecting a direct lending manager include: the size of the team; strength of the manager’s relationships in the market place and ability to source opportunities (typically the close rate for a manager is 3% and as such deal flow is important); and being on the side of the transaction that controls the legal documentation.     

  • Distressed debt is more cyclical (compared to direct lending) and deployment of cash is expected to be slow in today’s market environment. The panel felt that this would be an interesting time to consider a distressed strategy.
     

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Session Recaps

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