Kilde’s Fountain of Finance #14 - 16 July
This edition delves into the significant growth of the private debt market, a sector projected to expand to a staggering $2.3 trillion by 2027. We also explore the potential impact of impending monetary policy changes on corporate credit and M&A growth, as well as the innovative trends in wealth tech identified by ARK Invest. Additionally, we scrutinize the IMF's apprehensions about liquidity risks in private credit markets.
With private credit now a $1.9 trillion asset class, the trend of investors exploring dedicated allocations is on the rise. We aim to equip you with crucial insights for constructing a robust, diversified portfolio that effectively manages risk and maximizes returns. This will involve diversifying across corporate credit, real asset credit, and speciality/alternative finance to access a range of risk and return profiles.
Effectively managing alpha variability, which denotes the excess return of an investment compared to a benchmark index, across funds is of paramount importance. For instance, senior credit benefits from diversifying across 5-7 funds, while junior credit may require 12+ funds for similar risk management.
Lastly, we'll examine China's evolving asset management industry, which is facing challenges similar to Japan's struggle with low returns and increasing balance sheet stress. With $3.7 trillion under management, the industry is adjusting to a new reality as the economy slows, which includes increased regulatory scrutiny and a shift towards more sustainable investment strategies. This examination will help you feel aware and prepared for the changes in the industry.
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Private Debt Market Projected to Hit $2.3 Trillion by 2027 Amidst Rising Interest Rates and Increased Investor Demand.
Private debt is emerging as a significant asset class, with the global market projected to reach $2.3 trillion by 2027, according to Preqin. This growth has been fueled by increased bank regulations after the global financial crisis, allowing private lenders to fill the void left by banks.?
Even in today's rising interest rate environment, double-digit returns are possible, making private debt an attractive option. Direct lending to tech companies is a crucial European sub-segment, as growth-stage firms turn to private lenders when banks pull back.?
Private debt appeals to investors as it allows investment in the senior-most part of a company's capital structure, often with a steady income stream. Lenders can tailor solutions to a borrower's needs and negotiate customised covenants to mitigate risk.
Specialist lenders with sector expertise, rigorous underwriting and portfolio diversification are indispensable. This ensures quality investment products tailored to clients' risk profiles.
Link to report - https://www.fincite.de/en/wealthtech-radar-2024
Easing Monetary Policies to Boost Corporate Credit and Drive M&A Growth Amid Modest Spread Widening
As we enter 2024, the tightening cycle of 2022-23 is nearly complete, with most major central banks expected to pivot toward more accessible monetary policy by mid-year. Fed forecasts three 25bps rate cuts in 2024, though markets expect nearly double that pace of easing. As UST yields come down, this will likely drive higher fund inflows into corporate credit.
MUFG expects IG issuance to increase by 10% by 2024 on pent-up demand and more stable rates, driving higher M&A volumes. In HY, volumes could rise 30% with lower funding costs and refinancing of 2025-26 walls. With policy rates declining and demand rising, credit spreads should widen only modestly in a mild recession scenario. Though spreads are below LT averages today, bonds offer an attractive entry point compared to stocks.
Overall, while tightening still operates with a lag, the turn in policy toward easing will be a tailwind for credit markets in 2024. The outlook is positive, but uncertainty remains, especially in the geopolitics
ARK Invest Forecasts Trillions in Value by 2030 from the Convergence of AI, Energy Storage, Robotics, Multiomic Sequencing, and Public Blockchains
ARK Invest's latest research reveals that the convergence of five major innovation platforms—AI, Energy Storage, Robotics, Multiomic Sequencing, and Public Blockchains—is set to transform our world.?
These technologies are poised to catalyse each other, creating a flywheel effect that could generate trillions in value by 2030:
? AI will automate knowledge work and permeate every sector
? Advanced batteries will enable Autonomous Mobility and transform energy
? Adaptive Robots, guided by AI, will revolutionise manufacturing?
? Multiomic tech will decode biology, unlocking Precision Therapies
? Public Blockchains will upend the financial system with Crypto and Smart Contracts
The synergies are mind-blowing. For example, AI converges with Autonomous Mobility, Multiomics, and Robotics. Meanwhile, Energy Storage breakthroughs are critical to Autonomous Mobility and Reusable Rockets.
ARK believes these five innovation platforms will account for ~60% of all risk assets and most of the market cap growth this decade.
Don't get left behind as the techno-economic landscape transforms before our eyes!
Link to report - https://www.spglobal.com/spdji/en/research/article/the-hare-and-the-tortoise-assessing-passive-s-potential-in-bonds/
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IMF Warns of Liquidity Risks in Booming $1.7 Trillion Private Credit Market Amid Potential Financial Stress
Private credit markets face potential liquidity risks if financial stress rises, warns the IMF in a new report.?
The $1.7 trillion private credit sector has increased recently, providing critical financing to many companies. However, this growth also means the industry has yet to be thoroughly tested in a market downturn.?
Some key risks highlighted by the IMF:
- Liquidity demands on funds if investors rush to withdraw money?
- Deteriorating credit quality of underlying borrowers in a recession?
- Lack of transparency, making it hard to assess risks fully?
The IMF calls for regulators to monitor private credit markets closely. While the sector has filled important gaps left by banks, a surge in losses could have broader implications for financial stability.?
Investors should carefully consider these potential downside scenarios as private credit continues its meteoric rise. The actual test of this market's resilience may be yet to come.
Building a Private Credit Portfolio: A Balancing Act?
As private credit has grown into a $1.9T asset class, more investors are considering dedicated allocations. But how do you construct a diversified portfolio that balances risk and return??
Here are some key considerations:
Don't rely solely on mean-variance optimisation. Consider the underlying return components and ways to diversify risk.?
Diversify across corporate credit, real asset credit, and speciality/alternative finance to access varying risk/return profiles.?
The variability of alpha across funds represents idiosyncratic risk. They decide how many managers are critical for risk management and what kind of managers are needed.
Senior credit benefits from diversifying across 5-7 funds, while junior credit may require 12+ funds for similar diversification.?
China has started to resemble Japan in asset management.
The industry, managing a staggering $3.7 trillion, is grappling with:
Subpar returns below 3% - a far cry from the juicy yields of the past?
Rising balance sheet stress as the economy slows and risks mount?
A disorienting new reality for the nation's savers, who once relied on superficial bank deposits?
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About Kilde
Kilde is an investment platform tailored for individuals and institutions, providing access to private credit deals supported by cash-generating assets. We offer up to 13.5% annual returns to our investors, surpassing similar risk investments yielding around 8%. We are licensed by the Monetary Authority of Singapore. Find out more: https://www.kilde.sg/