By Daniel Lanyon on Friday 20 January 2017
The asset management giant also highlights four major secular changes afoot for investors.
Trump and Brexit have prompted four major secular changes investors must consider, according to Henry McVey, Head of Global macro & asset allocation at KKR.
These are: fiscal stimulus over monetary, domestic agendas over global ones, deregulation over reregulation, and a broadening of outsized volatility from the currency markets to include global interest rate markets.
The investable universe of of non-bank lending - or alternative credit as many call it - has swelled rapidly in the past few years thanks to several factors including ongoing pressure on banks and the low yields on offer for regular fixed income instruments as well as technological change.
Donald Trump’s ascendancy to the Presidency of the U.S. more recently is confirmation of both a political and economic paradigm shift, McVey believes, that started with Brexit in the UK but is likely to continue for the foreseeable future, including within elections across Europe in 2017. For this reason he says the firm is backing alternative credit to be a star performer over the next 12 months.
“In terms of asset allocation preferences for 2017, we are still probably most excited by what we see in private credit on a risk-adjusted basis. We also believe that Real Assets, particularly those with yield and growth, can prosper in the macro backdrop that we envision.”
McVey says the firm believes alternative/private forms of credit will outperform regular fixed income and therefore remains one of its most outsized non-benchmark overweight allocations
“Similar to last year, we are still finding a lot of opportunity in the performing side of the Private Credit Markets across the U.S., Europe, and even Asia. In fact, performing Private Credit, particularly at the large end of the market, remains our highest conviction risk adjusted return idea again in 2017.”
KKR is maintaining a fairly robust level of 13 per cent of exposure to the asset class versus a benchmark of zero.
Within the alternative credit universe, the firm is selling down its exposure to direct lending, however. Instead KKR is increasing its allocation to greater asset-based lending as well as mezzanine debt exposure.
“We like the return profiles on the increasing number of opportunities that we are seeing in this segment of the market. Also, given that so much of the activity is currently being sourced out of Europe, we believe that it will be less susceptible to deregulation headline risk in 2017.”
“We are going to watch this area of the market throughout 2017 to ensure that a shifting regulatory landscape does not squeeze the healthy illiquidity premium we still see in both the direct lending and asset-based lending markets.”