Credit: Still the Golden Age

By: Mark Jenkins

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When it comes to credit investing, what a difference a year makes. At the beginning of 2023, the market expected multiple headwinds in early 2023; defaults were expected to increase, the U.S. seemed to be headed towards a recession, and equity markets were in the midst of repricing. Uncertainty was on everyone’s minds.

Today, however, is a significant contrast to that environment. The credit landscape is in a much different space than a year ago, and the conversations that took place at our recent 2024 Global Credit Conference gave a chance for Carlyle’s leadership and Global Credit team to meet with over 175 of our investors and discuss the opportunities in the space.

Here are some trends that emerged from the conversation:

1. The current macro and investment environment has changed.

Carlyle believes that interest rates will be higher for longer than previously expected, and that implied yield could decline in the coming months. The U.S. economy is healthy, thanks to a reduction in core inflation and continued annual growth in revenues.

Deal flow across the industry is picking up in 2024. Although M&A activity was muted in 2023, companies took advantage of the landscape to prepare for new deal activity in 2024. We’re seeing it in stronger year-over-year deal volume across LBOs, refinancing, and dividend recaps, spread compression, and tackling the impending maturity wall. Based on these indicators, we’re seeing markets open back up. 

2. Asset-Backed Finance is gaining prominence as bank lending tightens.

Asset-Backed Finance (ABF), which is acquiring and lending against diversified pools of assets with contractual cash flows, is becoming a more prominent solution in the market. These assets are often pooled together and securitized, creating private, investment grade investment opportunities for institutional investors and insurance companies. ABF is not a new type of lending, but as banks are facing continued headwinds from elevated funding costs, increased regulatory capital requirements, and long-term declines in the supply of bank deposits, banks are tightening their lending by moving assets off balance sheets as they narrow their focus. We see this as a secular change that will persist moving forward, not a short-term trend.

In this changing environment, private markets have an opportunity to step in and lend to the “real” economy, allowing investors access to the net interest margin that has historically resided on bank balance sheets. This also means investors can access ABF without having to take on other, less desirable risks embedded in bank equity. With bank total assets held in ABF asset classes at $15+ trillion[1], ABF could be a new frontier that significantly increases the addressable investment opportunity set in private credit.

3. Hybrid strategies combining liquid and private markets continue to grow.

Historically, credit investors have treated liquid and private credit markets as separate entities and approaches, clearly delineated and bifurcated based on needs and strategies. That’s changing, as we are seeing a convergence of these markets.

Borrowers may seek hybrid solutions across the capital stack from both liquid and private credit markets.  In addition, there may be historical broadly syndicated loan issuers that rely on private markets in periods of public market dislocation. 

For companies and investors, this means approaching each transaction on a case-by-case basis and creating a package that meets the needs of that situation. And while some situations benefit from a single-solution approach, aligning the best option available to the needs of the borrowing company means the opportunities for hybrid strategies continue to increase. While we continue to see convergence between the two, we believe both markets will continue to grow in tandem.

4. The growth of AI leads to new investment opportunities.

It’s clear that Artificial Intelligence (AI) is rapidly being integrated into the business world as a lever to improve productivity and agility, but its impact may be underestimated. While many are focused on the benefits of generative AI, fewer are considering the exponential increase in data and computing power that’s also taking place with similar velocity.

With this technological evolution comes an equally rapid need for data collection, storage, and enough energy to power AI as it becomes commonplace. By comparing the anticipated need for computing power and AI with current infrastructures and energy capacity, investors can begin to appreciate the gaps that exist today. Armed with this insight, investors see the opportunity for future investments in energy production, data storage, and the broader digital infrastructure.

Today’s investors know that the world of credit investing is changing, and they’re embracing the opportunities this evolution brings. As 2024 continues, we believe that with the right partner and strategy, the opportunity set for credit will continue to be strong.

Carlyle’s Global Credit platform manages $188 billion in assets across the risk return spectrum: from liquid, to private credit, to real asset strategies.

[1] FDIC, Carlyle calculations as of Q4 2023