Navigating private credit in a late- cycle environment

For investors, the challenge is clear: cash earns little, but rushing into deals risks overpaying for weaker assets.

- Jenna Hayes

One option is senior secured syndicated loans a high-yield, defensive investment for wholesale high-net-worth investors seeking both yield and resilience in a late-cycle market.

Late-cycle headwinds

Fund managers confront a difficult balancing act. With capital to deploy and performance pressures mounting, many feel compelled to hunt for deals even as valuations reach stretched levels.

The pendulum has swung dramatically from the post-GFC era when asset prices were depressed, and lenders could demand rich covenants. The current landscape finds sponsors and borrowers with strong bargaining power. In a scramble for volume, managers may accept thinner margins or loosen covenant protections risks that only become apparent when credit conditions sour. This 'reach for yield' in a supply-constrained market leaves portfolios vulnerable when credit conditions inevitably tighten.

The problem is compounded by the structure of many private credit funds. When investors need liquidity, they face a choice either wait indefinitely or sell their positions in distressed secondary markets at steep discounts. In addition, stale net asset value calculations mask growing credit problems until it's too late to react.

Direct loan investing

One remedy to the cycle-timing problem is to bypass pooled vehicles altogether and invest directly in individual loans. This approach allows investors to hold off deploying capital until they find the right opportunity. By underwriting each loan on its merits, investors gain control over timing, credit quality, collateral coverage and covenants. They can steer clear of so-called "cov-lite" structures-loans with minimal maintenance tests and focus on senior secured exposures that sit at the top of the borrower's capital structure.