There has been strong growth in investment in private credit markets. Opportunities in spaces such as real estate and structured specialty lending can prove attractive to investors, PIMCO senior vice-president and alternative strategist Nelson Yuan said.
Private credit managers have raised about $800 billion in assets since 2009, Yuan told the audience at the Investment Magazine Absolute Returns Conference. Almost three-quarters of that amount has been raised in the last five years. There has been strong growth in private credit assets in corporate direct lending and distressed credit, along with real estate and mezzanine private debt, Yuan said.
The growth in private credit has been driven by regulatory changes in the US since the global financial crisis that have led the banks to withdraw from corporate direct lending, real-estate lending and specialty finance such as consumer lending, he explained.
“Basically, private capital, and private credit in particular, have just tried to step into the void left by banks pulling out,” Yuan said. “Investors are starting to create a permanent private credit allocation within their portfolios.” The idea is that – much like private equity – it will continue to be a necessary part of the capital structure.
Given the growth in corporate direct lending, PIMCO has expanded its interest into other areas, Yuan said.
“We would recommend expanding your horizons beyond just corporate direct lending and looking at other markets,” he said. “One example is residential real estate. We have been really active in residential mortgage lending in the United States.
“Second is commercial real estate lending in the US, although to be fair our view is that equity prices on the commercial real estate side in the US are going to face headwinds going forward. That doesn’t necessarily mean as a lender, where you might be at a 60 per cent to 70 per cent [loan-to-value ratio] LTV, you’re going to take impairments or losses on your mortgage lending there.”
Yuan noted that PIMCO does not originate its own loans in real estate; rather, it works with a handful of screened partners who do the origination in return for origination fees.
PIMCO is also looking to both secured and unsecured consumer lending, “because again, we see that there has been a pullback of capital, so the supply/demand imbalance that used to be heavily skewed to the demand side is now more balanced; therefore, you can find some attractive opportunities there.”
Yuan noted that investment in private credit was pulling from a number of asset buckets – public equities, fixed income and private equity – which affects the return targets clients are seeking.
“It really ends up being a mix of different areas that investors pull from, which largely will influence how they’re thinking about where to put their money and which areas of focus they want to have,” he said.