Investors stick with private credit amid inflationary environment

Investors are chasing “attractive income and risk adjusted returns” in private credit amid slow growth and inflationary conditions, according to Epsilon Direct Lending.

The middle-market corporate direct lending investment manager said there had been strong investor demand for private credit, providing a favourable outlook for the asset class in 2024.

Epsilon co-founder, Mick Wright-Smith, said investors should keep their eye on non-cyclical industries, such as telecommunications companies, IT, healthcare and B2B services. This comes as traditional bank lenders are struggling to meet the demand of medium-sized businesses for more financing options, instead lending to “selective corporate borrowers”.

“We expect stable business to business demand and corporate borrowers’ increasing requirements for timely and bespoke financing options to drive outperformance in loans to medium sized businesses in these industries,” he said.

“In these conditions we can command greater return for risk in what is still a largely risk-off market setting for lenders. Our focus continues to be on supporting well-structured and considered transactions and lending to resilient corporate borrowers operating in defensive sectors.

“The Australian loan market has numerous segments which are underserved by traditional financiers.

“Borrowers value efficiency and certainty of funding, and sustainable excess returns can be generated from this opportunity. We focus on the intrinsic value of assets and believe that growing companies generating sustainable cashflows are valuable and attractive financing prospects.”

Wright-Smith said there are forecasts for a “steady but modest” rise in lender defaults in 2024, alongside increased merger and acquisition (M&A) activity.

“Whilst alarmist headlines about insolvencies will grab attention, we believe fundamental performance of private credit funds will remain strong. Default rates are coming off historic lows and are unlikely to increase much above long term averages,” he said.

“Expectations are that 2024 is shaping up to be a stronger year for M&A activity than 2023 and we are certainly seeing this in our investment pipeline with corporates pursuing buy-and-build strategies to consolidate their market position.”