John Christmas, Co-Head of Business Development and Investor Relations for HPS Investment Partners, joined Keith Black, Managing Director of RIA Channel, to discuss the role of private credit in portfolios and the due diligence information available to investors.
HPS Investment Partners is solely dedicated to alternative credit. HPS has investment vehicles focused on a variety of alternative credit strategies.
Private credit tends to grow after times of market dislocations, such as the 2008 global financial crisis. Regulations put in place after the GFC increased capital charges, making it difficult for banks to make certain types of loans. Private credit lenders originate loans to borrowers after banks step back from a specific sector. Christmas notes that 85% of private credit lending is to support acquisitions by private equity firms.
Christmas notes that the role of private credit in portfolios is evolving. Previously, private credit was an alternative investment compared to private equity, where it offered lower returns but greater income. Today, private credit is viewed as an income strategy, competing with fixed income strategies such as high-yield bonds and leveraged loans.
Borrowers seek capital in the private credit market when they find it difficult to access low-cost loans from banks or public markets. In uncertain times, borrowers seek private credit from lenders who can provide more certain capital on a very timely basis.
Investors need to perform due diligence before making investments in private credit, as there is a dispersion of returns across managers and strategies. Returns and risk may differ between upper and lower middle market borrowers. Christmas encourages investors to diversify across the different strategies within private credit. Some private credit strategies, such as BDCs are SEC registered or publicly traded, with substantial transparency provided that facilitates investor due diligence.
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