By Daniel Lanyon on Monday 5 September 2016
The US private equity giant sees a huge opportunity in credit markets benefiting from the disruption of traditional banking models.
A major spike in opportunities is occurring in several areas of alternative and private credit, according to Henry Mcvey, head of global macro asset allocation at KKR.
The investable universe of the many and varied forms of non-bank lending - or alternative credit as many call it - has swelled rapidly in the past year or so thanks to several factors including ongoing pressure on banks and the low yields on offer for regular fixed income instruments as well as the secular technologial trend evident in fintech of more efficent IT systems.
Mcvey says the team at KKR have been increasing alternative/private credit across their portfolios in recent months.
“Within credit we are most intrigued by the opportunities we see related to periodic dislocations and/or structural changes across the banking system. We feel strongly that private credit will continue to be a star performer,” he said.
“Given the shift towards negative interest rates and ongoing and intensifying regulation of the banks, we are seeing a major spike in opportunities in the mezzanine and asset-based lending areas of the global economy, Europe in particular,” he added.
"Some of the more interesting risk-adjusted opportunities the team are seeing are occurring in situations where banks have fallen away as the traditional lender of choice for firms and industries."
In addition many of these opportunities are occurring when volatility trends higher, not lower; such as during the Brexit fallout. This gives the exposure a somewhat counter-cyclical component to a portfolio.
KKR’s “outsized bet” on alternative credit is centred on direct lending, asset-based lending and mezzanine debt.
McVey said:”Our positive rationale rests on three pillars. First, with leveraged lending guidelines now being enforced more strictly, corporate and financial acquirers must look beyond traditional financial intermediaries to support their deals."
“Second, there is less capital available for small-to- medium-size businesses, as banks reduce their footprints amidst shrinking net interest margins and heightened regulation. Finally, we think that current deal terms now often favor the lender, not the borrower, which is different than 12 to 18 months ago.”
Key growth markets within alternative credit now include aircraft leasing, alternative energy financing, acquisitions and capital spending investments, he says.
“Our basic premise is that — given the asynchronous world that we now live in — economies, markets, and flows are likely to continue to periodically seize up when macro shocks occur.”
“If we are right, then these dislocations create excellent times for asset-based lenders to deploy capital that fills the gap increasingly being created by a smaller, simplified, and more regulated banking system.”
KKR are not the only traditional asset manager to be looking at alternative credit markets increasingly of late. PIMCO has also recently flagged its growing interest in the space joining a host of other major players looking for opportunities.