Kilde’s Fountain of Finance #5 - 04 December

Greetings!?

In this newsletter edition, we have included insightful reports on the growing prominence of private debt markets, the appeal of private credit for family offices, and the latest trends in the global private debt market. We have also covered a range of investment topics, including updates on Bain's recession monitor, insights into the junk bond market and bankruptcy risks, and a thought-provoking discussion on the $500 billion challenge faced by private debt funds.

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Kilde’s Industry Intel: Our favourite Industry Report Roundups

Private Debt Markets: A Rising Tide Amid Economic Challenges

Mergermarket's latest report reveals intriguing transformations in the private debt markets. A ten-fold increase in AUM over the past decade signals the market's robustness and potential for future growth.

Direct lending has retained its prime position, but the arena diversifies into sophisticated strategies like distressed debt and special situations. These new avenues carry their own set of challenges and risks, necessitating cautious navigation.?

Public pensions, sovereign wealth funds, and private institutional investors have propelled the market's growth trajectory. An exciting development is the rising demand from individual accredited investors, hinting at the sector's expanding reach.

Market volatility in the public sector is aiding the expansion of the addressable market, but increased regulatory scrutiny poses a looming hurdle. The market's maturity is evident in the emphasis on transparency and reporting, a differentiating factor in this competitive space.

In the digital era, the report underscores the urgent requirement for better data and technology, particularly in portfolio management. Despite economic uncertainty, the private debt market continues to affirm its status as a vibrant alternative asset class. The future appears bright with prudent risk management and transparency. Reference: https://community.ionanalytics.com/private-debt-coming-of-age-amid-economic-strife

Read the blog on our website:https://www.kilde.sg/post/private-debt-markets-a-rising-tide-amid-economic-challenges

The Allure of Private Credit Yields for Family Offices

The latest Global Family Office Survey reveals a growing global appetite for private credit among family offices. Here are some of the key findings:

Sentiment most bullish on private credit and global IG fixed-income?
Allocations average just 3% currently; lots of scope to increase?
Prefer private equity funds (53%) and direct deals (34%) for exposure?
Dislocations create opportunities to deploy capital at high yields?
Private credit offers illiquidity premium over public markets?
Potential for equity-like returns over 3-5 years as markets normalize?
Flexibility to invest across structures and rating spectrum?
Customized portfolios available to meet specific requirements?
Diversification benefits from low correlation to traditional assets?
Ability to support ESG financing strategies?

With high yields on offer, private credit provides income potential. As spreads compress, capital appreciation could boost total returns. Many leading family offices deploy more capital while valuations are appealing. With rigorous manager selection, private credit could enhance portfolio returns. Reference: https://www.privatebank.citibank.com/insights/the-family-office-survey

Read the blog on our website:https://www.kilde.sg/post/the-allure-of-private-credit-yields-for-family-offices

Private debt is uniquely positioned to capitalise on today's market turmoil

The private debt market continues to see strong inflows, with H1 2023 fundraising at $94.9 billion - on track for the 4th consecutive year above $200 billion. Mezzanine and special situations funds have gained share vs direct lending mega-funds, showing increased diversity at the top.

Performance remained resilient in 2022: Private debt returned 4.2%, ahead of most other private market strategies, while many public equity and fixed-income markets saw double-digit losses. This demonstrates private debt's downside protection.

Direct lending origination has slowed but still outpaces broadly syndicated loans for LBO financing. As banks pulled back, private lenders filled the gap - taking a significant market share in H2 2022. Activity is now rebalancing, but direct lenders remain an integral part of the LBO financing equation.

LBO activity plunged 50.7% YTD, which will impact private debt deal flow. But, distress remains limited, and private debt continues finding opportunities - especially in the middle market. Managers are adjusting terms to adapt to the new rate environment.

With over $1.5 trillion in dry powder, private debt is ready to put capital to work. Rising rates create an attractive backdrop for making floating-rate loans. Managers are expanding into new frontiers like asset-backed finance as banks face regulatory constraints. Reference: https://pitchbook.com/news/reports/h1-2023-global-private-debt-report

Read the blog on our website: https://www.kilde.sg/post/private-debt-is-uniquely-positioned-to-capitalise-on-todays-market-turmoil

Kilde’s latest scoop on Investing

The Latest in Recession Monitor by Bain

Check out this intriguing analysis of the global recession by Bain & Company. Although it predates the war in Gaza, it appears that inflation is decreasing across all major economies.

There is an elevated risk of recession in major economies like the US and Europe. Indicators like yield curve inversion suggest a recession could occur in the next 12 months.?
Inflation has come down from peak levels but remains high in most regions. The US saw inflation slow to 3.7% in August 2022 after peaking at 9.1% in June 2022.?
Economic growth is slowing globally. The eurozone saw GDP growth of just 0.5% in Q2 2022. The UK had near-zero GDP growth over the past year.?
Central banks have aggressively raised interest rates to combat inflation, impacting economic activity. It's still being determined if rate hikes will continue.?
Structural challenges in Europe, like demographics, energy, and the Ukraine war, present headwinds to growth.?
China's economic rebound remains uncertain amid shifting policies and challenges. Japan has seen high inflation not witnessed in decades.?

Overall, the environment of uncertainty globally suggests that companies should prepare for a range of economic scenarios. Reference: https://www.bain.com/insights/global-recession-watch-latest-data-snap-chart/

Read the blog on our website: https://www.kilde.sg/post/the-latest-in-recession-monitor-by-bain

Ignoring Rising Bankruptcy Risks: The Junk Bond Market

As interest rates have surged, bankruptcies are hitting levels not seen since the financial crisis. But, junk bond risk premiums remain relatively low, around 420 basis points this year, suggesting investors don't see companies as very risky.

This disconnect between spreads and fundamental insolvency risks is concerning. Spreads should be priced in more risk based on warning signs like mounting corporate debt loads and recession risks.?

Investors seem yield-hungry in the junk bond market, reaching for return and not fully accounting for risks. This complacency can be dangerous if bankruptcies accelerate.?

The race for absolute yield in a high-interest rate environment and a high volume of dry powder needing deployment is causing this spread compression. Investors are yield-starved and relying too much on the risk-free rate component while demanding less than expected credit risk spread.

Reference:https://www.bloomberg.com/news/articles/2023-10-26/junk-investors-turn-blind-eye-as-bankruptcy-warning-signs-flash?sref=KJhMH2ka

Read the blog on our website: https://www.kilde.sg/post/ignoring-rising-bankruptcy-risks-the-junk-bond-market

Private Credit's Meteoric Rise Creates Growing Pains

Private credit has seen explosive growth in recent years, with assets under management tripling since 2013 to over $1 trillion globally. However, this rapid expansion is causing major headaches:

Dry powder dilemma: Fund managers have ~$500 billion in uninvested capital but fewer deals to deploy it in. They missed out on over $7 billion of potential lending opportunities in just the past few days.?
Increased competition: Revival of bank lending is cutting into private debt deals. New entrants into private credit will make the deal famine even worse.
Pressure to put money to work: Private credit funds feel pressure to invest their capital, even if it means loosening underwriting standards or accepting lower returns. This raises concerns about frothiness.

While private credit has been a high-flying asset class, its breakneck growth could become its Achilles heel. Fund managers will need to remain disciplined to avoid reckless lending behavior. The industry's growing pains bear monitoring. Reference: https://www.bloomberg.com/news/articles/2023-10-28/private-debt-funds-have-a-500-billion-conundrum-credit-weekly

Read the blog on our website: https://www.kilde.sg/post/private-credits-meteoric-rise-creates-growing-pains

About Kilde’s Fountain of Finance

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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/