Non-public credit score has earned a everlasting place in traders’ portfolios, based on KKR’s co-head of credit score and markets Christopher Sheldon.

Following a robust two years for the non-public credit score market, Sheldon believes traders and debtors have a brand new appreciation for a way helpful and resilient non-public credit score might be. This has led to an acceptance of personal credit score as a mainstay in traders’ asset allocations.

“In 2022, non-public credit score investments provided excessive revenue, low defaults and fewer volatility. That in contrast favourably to public markets, which additionally provided excessive revenue and low defaults however got here with greater volatility,” Sheldon famous in KKR’s newest market evaluation.

He believes we’ve entered a golden age for credit score allocation, which partially might be attributed to the “super development” in non-public credit score over the previous decade. This has created a various vary of choices for traders in the present day.

“We expect direct lending will stay an essential a part of the borrower’s toolkit, providing elevated flexibility and certainty in comparison with syndicated markets. It is going to stay an essential a part of the financing toolkit,” Sheldon defined.

“Non-public lenders ought to profit from general development out there as a consequence of elevated transaction exercise, and we’re optimistic for a robust classic in 2024 and 2025.”

Sheldon additionally factors to the potential for a “mutually helpful coexistence between liquid and personal markets”, which he says is already evident in junior debt markets.

Liquid credit score nonetheless engaging

Following a robust 2023 for liquid credit score markets, Sheldon believes there are nonetheless engaging returns probably out there.

“Although some might really feel that the perfect days have handed, we nonetheless consider that the liquid market is engaging for traders who want to deploy shortly and acquire entry to excessive ranges of present revenue with what we really feel are restricted dangers of outright losses,” he added.

Nonetheless, Sheldon famous that “agility and idiosyncratic credit-picking” will show paramount as dispersion will increase.

Outlook for defaults

Whereas traders could also be feeling nervous about placing cash to work if company margins start to deteriorate, Sheldon expects defaults will improve however acknowledges that this could additionally create alternatives.

“Our view stays that the [US] financial system is slowing, defaults will rise however not skyrocket and dispersion will improve, creating alternatives for credit score choice,” he famous.

KKR expects ranges of defaults to differ considerably throughout sectors and areas, concentrating in some pockets of the market greater than others.

KKR has been including to excessive yield over the previous few months. It has additionally elevated publicity to collateralised mortgage obligation (CLO) debt to be able to choose up incremental revenue and offset any strain to get the timing proper on rate of interest cuts.

Don’t miss the chance

Sheldon concluded by urging traders to withstand the urge to get too granular relating to deciding when to spend money on credit score.

“It’s potential to obsess over entry factors, rate of interest strikes (significantly with charges as excessive as they’re), and the doubtless path of the financial system to the purpose of foregoing the chance to get cash deployed,” he stated.

“With rates of interest more likely to stay elevated for the foreseeable future, it’s nonetheless a great time to be a credit score investor.”