With the volatility in the public markets persisting due to concerns about the COVID-19 variant and the potential impacts of higher inflation, institutional investors have continued to seek out alternative assets that provide diversification and an attractive risk-return profile.
For an increasing number of investors, the solution has been middle-market private debt, an asset class that proved its resilience amid the uncertainty of the pandemic last year and exhibited default rates that remain relatively low, according to Tyler Lindblad, chief credit officer at Antares Capital. Investors appreciate the yield that private debt can offer, its illiquidity premium relative to public debt and the speed with which a deal can close relative to the longer timeframe to secure bank financing.
“When COVID hit, there was initially great concern in private debt,” Lindblad said. “But private equity sponsors were really able to manage their portfolio companies well, cutting their expenses and supporting the companies with additional injections of equity.”
Besides seeing that resilient corporate performance, many investors are realizing that middle-market debt portfolios are tied to the rebounding U.S. economy, added Lindblad. “The U.S. economy is in a strong position, and it continues to get stronger, given consumer spending and the potential for another stimulus package out of Washington,” he said. “Although there will be some modest pressure for interest rates to go up, relative to historical levels, interest rates are still very low.”
A majority of institutional investors are relatively bullish on the economy, Lindblad noted. Nearly 60% of sponsors — the private equity firms that back the borrowers — and three-quarters of investors said that they had confidence in the performance of the global economy over the next year and that a 2021 U.S. recession is “very unlikely,” according to a survey conducted earlier this year by Antares Capital.
Given that overall macroeconomic view, investors who want to diversify their portfolios are considering allocations to private debt, which has seen a strong increase in deal flow, Lindblad said. Other factors driving a pickup in deal flow include the potential for additional fiscal stimulus and a large amount of dry powder at private-equity firms.
Even as private debt has become a larger and more competitive market, Antares Capital — which manages one of the largest, most diversified portfolios in middle-market private debt — has kept its overall strategy largely consistent in its extreme focus on selectivity in credit decisions by disciplined underwriters with decades of experience, Lindblad said.