Jamie Dimon questions private credit
Jamie Dimon questions private credit
Fundraisings from Ares, Acre Impact Capital and Eiffel Investment Group
đ Hey, Nick here. If youâre new, this is the 58th edition of my weekly newsletter. Each week I write about private credit insights and fundraising announcements. You can read my previous articles here and subscribe here. Scroll to the bottom, if youâre here for the fundraising news.
đ Reads of the week
Bank of England is concerned about leverage in private equity Link
Blackstoneâs First Quarter 2024 Results Link
Riverside is selling its private credit strategy Link
đŹ Quote of the Week
Jamie Dimon - JP Morgan (Quote)
THE BENEFITS AND RISKS OF PRIVATE CREDIT
I have already mentioned some of the benefits of private credit, and Iâll now mention some more. Many people in the private credit arena are very smart and creative and want to help the companies they invest in navigate through market shoals. They can move quickly, discreetly and flexibly. Most generally understand that bad accounting drives bad decisions, and their goal is to make the right decisions for the future of the company.
On the other hand, not all players are that good. And problems in the private credit market caused by the bad players can leak onto the good ones, even though private credit money is locked up for years. If investors feel mistreated, they will cry foul, and the government will respond by putting a laser focus on the business. Itâs a reasonable assumption that at some point regulations will focus on the private markets as they do on the public markets.
This scrutiny will include a look at how private credit values its assets, which isnât as transparent as public market valuations. In addition, private market loans commonly lack liquidity in the secondary market and are not generally supported by in-depth market research.
New financial products that grow extremely rapidly often become an area of unexpected risk in the markets. Frequently, the weaknesses of new products, in this case private credit loans, may only be seen and exposed in bad markets, which private credit loans have not yet faced. When credit spreads gap out, when interest rates go up and when some leveraged companies suffer in the recession, we will find out how those loans survive stress testing. In addition, they can create a little bit of a âcredit crunchâ for borrowers since it might be hard for private creditors to roll over loans under those conditions. Under stress conditions, private creditors would have to charge exorbitant prices that companies simply cannot afford in order to book the new loan at par. Banks are in a slightly different position.
Banks generally try to be there for their borrowers in difficult times â striving to roll over loans, renegotiate terms and raise additional capital. Banks do this for multiple reasons: They normally feel an obligation to help their clients, they have long-term relationships and they can commonly earn other sources of revenue from client-driven transactions. Banks can also flex their capital and lending base as needed by their clients. This is because a bank can and should make decisions to help companies through good times and bad, seeking to retain them as long-term clients across many areas of the bank. They can and do take âlossesâ that help the client maintain the franchise. But an asset manager must act as a âfiduciaryâ of other peopleâs money and cannot lend based on a moral obligation or potential future relationship.
Recently, we have been witnessing a convergence between the public and private markets. But itâs too soon to say how this ultimately will play out, particularly if we go through a recessionary cycle.
đCharts of the Week - Moodyâs on BDCs
Moodyâs reduced its outlook for BDCs managed by BlackRock, KKR, and Oaktree, lowering them to negative from stable.
The three BDCs each increased the number of loans on nonaccrual status.
For KKR and Oaktree, the dollar amount of nonaccrual loans more than doubled in the fourth quarter, to 6.4% and 4.5% of the portfolio respectively.
Well outside Moodyâs median of 0.4%
BlackRock TCP Capital saw a jump in nonaccruals to 2.2% from 1.2%.
Oaktreeâs largest nonaccrual was a $47 million loan to Thrasio. Thrasio lenders also include Bain Capital, Goldman Sachs, HPS Investment Partners, and Monroe Capital.
In addition to increasing nonaccrual loans, Moodyâs also highlighted the increasing PIK.
đ°Fundraising news
Ares launched its $1.5 billion Specialty Healthcare Fund I. The fund will lend to businesses focused on pharmaceuticals, biotechnology, medical devices, diagnostics, and specialty services. Target companies will be cashflow negative but in the commercial stage of development with limited FDA-approval related risks. New Mexico State Investment Council has committed up to $200 million to the fund. More here and here
Acre Impact Capital, a London-based impact investor, announced a first closing of $100 million for its Export Finance Fund I. The fund aims to support climate infrastructure investment across Africa. It will provide commercial debt to infrastructure projects looking to take advantage of loans guaranteed by export credit agencies. Acre Impact Capital focuses on four thematic areas strongly aligned with the UN Sustainable Development Goals: (i) Renewable Power; (ii) Health, Food and Water Scarcity; (iii) Sustainable Cities and (iv) Green Transportation. The fund has a target size of $300 million. More here
Eiffel Investment Group, a Paris-based asset manager, is launching an impact debt fund. The fund will target financing companies with âŹ5-10 million EBITDA on average. Eiffel manages around âŹ6bn of assets, half of which is invested in private debt and âŹ2bn of which is committed to energy transition. The firm has historically done some unitranche deals for smaller companies, but this is the first time that it will have a dedicated impact unitranche fund. More here