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Special Edition: IMF Sees Rising Risk in Private Credit | Macquarie's $500 Million Lambda Deal
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Welcome. In this special edition, WSJ Pro explores the growing array of funds, deals and people gravitating to the private-credit strategy. We send out this credit-focused newsletter every two weeks, pulling together recent news and analysis from WSJ Pro and other Dow Jones brands.
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The International Monetary Fund called attention to several potential risks associated with private credit and the sector’s rapid growth, in a report earlier this month.
These risks stem from factors such as multiple layers of leverage, relatively fragile borrowers, a lack of liquidity and stale valuations that aren't based on market prices.
While these risks pose no imminent threats, Fabio Natalucci, the deputy director of the IMF’s monetary and capital markets department, said they still deserve attention and could become more significant should sudden stresses arise such as a rapid market decline or sudden economic slump.
Covid-related disruptions were relatively brief and the Federal Reserve shored up a number of markets, Natalucci said. After more than a decade of expansion, private credit hasn't been put to the test of weathering a deep and prolonged recession, he noted.
Because of this, several safety measures designed to mitigate risks have yet to be tested.
One such measure comes in the form of sponsored loans, which are viewed as a backstop against economic downturns. These loans support companies that are backed by private-equity firms, which typically want to preserve the value of their investments.
Sponsor firms may choose to inject fresh capital into their portfolio companies, thereby reducing the chance of a default.
However, firms that add liquidity through borrowing amplify attendant risks by increasing leverage. That can lead to leverage ratios that would be considered excessive by banks, according to the report.
Fund investors, or limited partners, also add to the multilayered leverage issue. LPs, like insurers and pension funds, can also leverage their fund investments, making them vulnerable to economic and market stresses as well, the IMF said.
While the organization offered no remedies, it cited the opacity of private-credit operations and called for greater regulatory scrutiny as a way to better identify sources of potential systemic risks.
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More below: Barings laid out a plan to rebuild its direct-lending team. Macquarie Group led a $500 million vehicle. Hiring remains strong.
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Golub Capital Shares Credit Insights
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Spyro Alexopoulos, the co-head of direct lending at Golub Capital, shares his views on private credit's increasing popularity and some of the challenges facing the industry. He joined the firm in 2007 and is responsible for overseeing origination, deal execution and capital markets. Alexopoulos previously worked for Silver Point Capital and GE Capital’s Global Sponsor Finance group. Responses have been edited for clarity.
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WSJ: What is driving so much attention to private credit?
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Alexopoulos: What's attracted investors' attention is [the fact that] you have, because of its floating-rate nature, unlevered returns in this environment in the 11% to 12% region. And that's to invest in a tranch of senior-secured debt that comes at the top of the capital structure. In attractive loan-to-enterprise-value ratio situations and in our particular case, with plenty of cash equity behind you and strong private-equity sponsorship.
So I think that the combination of low risk, attractive returns—and then overlay that with an asset class that has been stable over multiple cycles—that starts to get pretty interesting in a world where there is a lot of volatility and and you're looking for stable, attractive returns with little to minimum downside.
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WSJ: What are some of the biggest obstacles facing the private-credit industry?
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Alexopoulos: With attractive spaces, there are new entrants and there's a lot of excitement and attention in the space.
We have more competition than we've had in recent times. So we've had more folks entering the space, and the M&A market is still relatively anemic based on historical norms. So, I think you kind of have a loan supply, demand issue, and there's been a little bit of spread tightening in our market in the last few months. And that's purely a function of too much demand going after too little supply.
I know sponsors have a lot of concern over the election year. There could be a rise in volatility or a challenge to get their deals financed. Where they can, they're looking to amend and extend any facilities just because they want to take the uncertainty off off the table.
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Banks Strike Back Against Private Credit
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When it comes to financing deals, don’t count out the big Wall Street banks quite yet. A big narrative in recent years has been that America’s biggest deposit-taking investment banks are losing ground to their nonbank rivals, the likes of Blackstone and Apollo Global. One worry for banks was that private credit was going to eat into investment banks’ business originating loans and distributing them to investors. But so far this year, a lot of financing deals are actually coming back to banks from private credit.
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Macquarie Group led a $500 million asset-backed vehicle to fund the expansion of on-demand, cloud-based services offered by artificial-intelligence infrastructure company Lambda.
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SK Capital Partners closed its sixth fund, SK Capital Partners VI, at $2.95 billion. The fund is the latest vintage of the firm’s flagship private-investment strategy.
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AGL Credit Management, an investment manager specializing solely on corporate credit strategies, and global investment bank Barclays launched a new private-credit investment platform, AGL Private Credit.
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Golub Capital announced that Shuji Hatsukaiwa has joined the firm as managing director of Japan and will be based in the firm’s newly opened Tokyo office. In his new role, he will be focused on deepening relationships with investors across Japan.
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Monroe Capital expanded its platform to the Middle East with the appointment of Waleed Noor as managing director and head of Middle East distribution. Monroe is in the process of opening an office in Abu Dhabi. Noor will be based in Abu Dhabi and be responsible for representing Monroe throughout the region.
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Barings laid out a plan to rebuild its direct-lending team after one of the largest asset-management raids in years, according to people with knowledge of the matter. In an effort to allay concerns after losing more than 20 senior staff, Barings has told investors that it plans to hire three managing directors in North America to help with origination, as well as three more in Europe. (Bloomberg News)
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Hong Kong’s government is considering new tax rules that would give more favorable treatment to popular alternative investments including private credit and infrastructure, according to people familiar with the matter. (Bloomberg News)
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Send us your tips, suggestions and feedback. Write to: Isaac Taylor
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