Trends Watch: Private Credit
March 19, 2020
By Elana Margulies-Snyderman
EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.
This week, Elana talks with Rodolfo Sánchez-Colberg, Managing Partner, Parliament Capital Management.
Editor’s note: This interview was conducted before the COVID-19 pandemic.
What is your outlook for alternatives?
Alternatives, if we are to continue calling them so, are here to stay and will continue to grow as an asset class and in terms of allocation within client investment portfolios. The reason being is that they afford the investor a mostly uncorrelated asset class to the traditional markets with the potential for enhanced or outsized returns. Particularly in this low rate environment, alternative assets provide the increase in yield that investors are looking for and require, while offering diversification to the investment portfolio.
As the asset class matures, investors will likely continue to increase their allocations to the alternatives “bucket” and I wouldn’t be surprised if it reached 25-35% of investor portfolios in the coming years.
Where do you see the greatest opportunities and why?
We believe that private credit generally is a significant area of opportunity. Driven by an “incumbent” financial system that is highly regulated and still bearing the scars of the global financial crisis, the lack of financing in certain sectors/industries has opened the door to a wide range of fund managers and fintech companies offering alternative lending sources to the marketplace. Due to the multitude of different industries, geographies, risk profiles etc., there are a massive number of niches or specialty areas were fund managers can focus and truly provide alpha to their investors. As an example, we focus on direct lending to lower middle market companies in underserved regions such as Puerto Rico, the U.S. Virgin Islands and certain Hispanic markets in the U.S. Are there a ton of direct lending funds in the U.S.? Yes. But are there a lot willing to do smaller loans in our target markets? Turns out, not too many. And that is what creates the opportunity for us to deploy capital in the form of senior secured loans with high returns. The same happens in other niches across the private credit landscape.
What are the biggest challenges you face and why?
Niche strategies are niche for a reason; not every investor is aware of the prospects and capital is not flowing adequately to address the opportunities. Therefore, our biggest challenge is always to raise the right amount of capital to serve the demand that we see in the market. Although it has been proven that emerging or specialized fund managers significantly outperform those established managers with a more generalist approach, it is still very time-consuming to raise capital and sometimes even becomes a distraction to the main job of identifying, structuring, closing and managing deals.
What keeps you up at night?
As is the case for most fund managers which have a fiduciary responsibility to their investors and also “skin in the game,” what keeps me up at night is the constant identification of potential risks or threats to our strategy. In a world where everything is connected and global, we constantly have to be on the lookout for events that may affect our target markets and strategy, be it public policy decisions by our leaders or the next health pandemic, in this day and age, anything can have a significant impact across the world. Thankfully, during this constant search is when new niche opportunities are identified.