When is something “private” not private anymore? When it goes public! Hopefully, everyone’s received the memo about the planned marketplace for private credit “tokenized access” to private debt in an interval fund or private credit wading into public IG bonds. And if that’s not enough evidence of private credit going public, look at how almost every private credit manager-big and small- is making a beeline for the general public with a slew of liquid vehicles-BDCs, ELTIFs, LTAFs, non-traded closed end funds and soon private credit ETFs, mutual funds etc. for inclusion in 401 (k) accounts.

This makes many global institutional investors I interact with wonder why private credit is extending itself to public markets or leaning public toward private wealth? Their angst stems from a lack of meaningful distributions from these same powerhouses who are exerting a big push into the masses while they sit on mountains of dry powder unable to deploy new capital (other than refis), a byproduct of their insatiable hunger to raise ever larger funds from global institutions.

To investors aggravation, mega managers are competing with banks for bigger deals (broadly syndicated loans), compromising spreads and covenants, and now partnering up banks to tap into their origination networks just to stay in business. To push the “default” can down the road in a higher interest rate environment, many are extending maturities, settling for deferred interest (PIKs) while some have little choice but to conduct liability management exercises to restructure the debt (opening themselves to creditor-on-creditor violence stemming from loose underwriting/covenants where some try to up-tier themselves at the expense of others or strip out assets altogether). And of course, to create synthetic distributions, some private credit managers are eager to extend NAV loans to PE sponsors, while exploring a private credit secondaries market echoing the plight (opportunity for some) of their private equity brethren.

In short, many institutional investors are concerned that the original appeal of a risk premium from private credit might wither away with a gush of new capital from the masses who might also draw their managers’ attention away from them. Those under-allocated thus far with a desire to up their allocations are drawing a pause when the opportunity set for sponsored lending (private credit’s mainstay) in US/Europe is going to remain challenged in a higher-for-longer interest environment with less than expected relaxation on the regulatory front for deal-making.

Some even wonder if the new buzz around asset-based finance (securitizing a range of consumer-auto, home, credit card, buy now pay later loans, other personal loans, aircraft leases, royalties etc.) has fundamental merits any longer because banks’ capital requirements (in line with Basel III endgame) potentially might be easing with the onset of a more regulation-friendly administration. Or is it just a ploy to exaggerate the size of the current $1.7 trillion private debt universe to $40 trillion to keep investors’ faith in the asset class with the allure of an expanding opportunity set even though more complex than the simple “direct lending” where it all began post GFC. And what if the big become even bigger (and more complex organizations with risks of culture clashes) in their quest for talent to execute these sophisticated securitizations, tokenization etc.?

Thus, the key question before institutional investors is whether they should seek complexity to generate steady returns in familiar but oversaturated (in both dollars and number of managers) markets of US /Europe facing all-round uncertainty, or should they pursue differentiated/less-correlated streams of predictable returns in less-trafficked regions of the world.

Using the same logic as for diversifying away from Mag 7 and US equity markets, (despite their dominance), and avoiding getting caught in meme stock frenzies, institutional investors might be better served to explore the maturing Asian private credit market which has drawn only 4% of all private debt capital raised since the GFC.

Asia led by China needs no introduction. The second largest economy is forging ahead in new areas of growth (green technologies, smart manufacturing, AI etc.) spawning new businesses, ripe for asset-based lending. A deleveraging drive by banks (similar to the urgency cited for US banks to offload loan pools) to free up capital to support a new economy away from residential real estate, affords tremendous opportunities for asset (loan to own) and debt restructuring, all presenting a rich playground for private credit investors with boots on the ground.

For those open to embracing intra-regional complexity, Asia ex. China is home to a strong consumer base, emerging manufacturing centers in Vietnam, Indonesia etc. and a technology hub in Singapore that afford plenty of opportunities for non-sponsored lending to small and medium enterprises.

The undisputed importance of local networks, intelligence, execution skills, language and culture pose high barriers to entry for foreign behemoths with war chests to deploy, leaving attractive risk-premiums (vs. compressed spreads in US/Europe) for China and Asia ex. China private credit specialists who remain relatively “private” unlike the dominant US/Europe managers increasingly in the public eye.

Finding the true “private” in private credit is now probably a better quest for institutional investors lured otherwise by the old promise of private credit in an increasingly challenged, complex, and changing (public) space.

Yours truly,
Kamal Suppal, CFA
Chief Investment Auditor
February 19, 2025
The above content is intended for sophisticated audiences as in institutional investors or family offices. Readers are advised that any theme or idea discussed above is not an offer to buy or sell any investment.