Beyond illiquidity, it is important to note that private credit investments carry other inherent risks such as credit risk, liquidity risk, and market risk, which investors should carefully consider before making investment decisions.
Nevertheless, managers with time in the market, such as M&G Investments, are well-placed to leverage their expertise and scale to navigate the often complex world of European private credit, allowing them to flex allocations to capture value across varying market conditions. Companies dynamically change their source of funding, leading to a blurring of the lines as both the liquid and illiquid segments of private credit markets converge. We believe managers with the right skillset are key in order to capitalise on this trend and help investors meet their objectives.
For example, liquid corporate private credit includes broadly syndicated loans that can offer quick deployment, portfolio diversity and liquidity, as well as potential downside protection afforded by security and seniority, with a largely floating rate structure. But some of the best opportunities in private assets are at the higher yielding end of the spectrum on the illiquid side of the market, in our view, such as direct lending to either large cap or mid-market companies where risk is often mispriced. Although liquidity is lower, we believe the inclusion of strong maintenance covenants (largely missing from public markets) may offer investors a risk balancing option whilst maintaining a return premium.
Why European private credit
“The fact the US is a larger market goes without saying, but with it being one jurisdiction largely governed by the same regulation, competition is high and we’ve seen a loosening of credit standards to win deals,” says Michael George, Fund Manager at M&G Investments.
“The growth potential is also more apparent in Europe,” he adds. “Banks have largely already retrenched in the US versus Europe which still has significant runway. We also see more tail risks in the US, larger CCC exposure, weaker fundamentals and delivered performance has undershot Europe over multiple time periods, 2023 included.”
