A Private Credit Update Series with Nehemiah Richardson
CEO and Managing Director of Pengana Credit, Nehemiah Richardson discusses Pengana’s multi-manager, multi-strategy global private credit fund, focusing on investments in mid-market corporates and non-bank lenders in the US and Europe.
Over the past six to twelve months, the investment team observed a shift from uncertainty to confidence in both markets, particularly regarding interest rates and economic activity. This increase in certainty led to a surge in economic activity, M&A transactions, and demand for credit, resulting in significant origination activity in the private credit space.
Despite growing confidence, credit managers remain cautious about the possibility of a soft or hard landing.
However, the team express optimism due to investments in defensive industries with clear cash flow visibility and structural protections, remaining confident in continued growth and volumes in the private credit sector.
Transcript:
Hi, I’m Nehemiah Richardson from Pengana Credit. For those of you who aren’t aware, we run a multi-manager, multi-strategy global private credit fund where we invest in managers who are at the coalface of our economies in both the US and Europe, lending money to mid-market corporates and mid-market non-bank lenders and structured finance. From that vantage point, I thought it would be useful to give you a perspective of what we’ve actually been seeing in both the US and European markets over the last six to twelve months because we still have quite a significantly evolving set of circumstances in those markets.
If I go back to halfway through last year and through the second half of last year, we went from having lots of dislocation, lots of conservatism, lots of uncertainty about what was actually going to happen in the economic environment going forward, and in particular, what was going to happen with interest rates, given the inflation genie hadn’t yet been put back in the bottle. As we went through the second half of the year, certainty started to return in terms of reaching the end, and sentiment returned towards conviction that we’re at the end of the interest rate rise cycle, and things should, therefore, normalize a bit.
From that, what has happened has been a significant increase in economic activity, particularly in the US, to some extent in Europe, which has actually then driven transaction volumes both from an M&A perspective because the M&A market started to come out of the doldrums, as well as demand for credit across all of our managers. And so, what that’s actually meant is for the global private credit space in both the US and Europe, as a proxy for what’s happening in the underlying economy, a lot more confidence to invest, a lot better understanding of what the valuation environment actually looks like going forward, and so companies actually having the confidence to start to invest.
What that then has meant is very significant origination activity actually happening in the private credit space across all of the strategies that we actually see, which has been pleasing for both our managers and, I think, pleasing for the economies. What I would now just close off with is to say, that while there is more confidence, credit managers are still very, very vigilant because it’s not really clear whether we really have met a soft landing or whether there’s going to be a hard landing.
But the positive thing about being in private credit with the managers that we invest in is they tend to invest in very defensive industries that have really clear line of sight of their future cash flows because in debt you want to get paid back. And because in their senior part of the capital stack with low LVRs between 30 to 40%, with really nice structural protections in the way they invest, they’re kind of agnostic as to really what happens in the economic environment. They’re very confident to be supporting the companies that they do and they’re having and they’re feeling very optimistic that this growth in confidence and volumes will continue.
Transcript:
Hi, I’m Nehemiah Richardson from Pengana Credit. Just wanting to give you an update on the performance of our wholesale fund, which opened in October 2023. For those of you who don’t know, our wholesale private credit fund invests as a multi-manager, multi-strategy private credit fund that invests in investment managers in both the US and Europe across predominantly two buckets of strategies: one is bilateral loans to companies, and the other is providing capital or balance sheet solutions to structured finance providers. So, generally speaking, those would be non-bank lenders who originate pools of assets. So, those are predominantly the two types of managers that we actually invest in, and they all play different strategies within those spheres.
Coming to the performance of the fund, the backdrop since we opened the fund has been a shift in the market from being very dislocated with a high degree of uncertainty to a little bit more certainty that the interest rate cycle will now plateau and we won’t continue to see rising rates to fight inflation, and we’re more likely to see higher for longer. And as a setting, I think a lot of our global private credit managers believe that that’s sort of where we’re at. And as a result of that, the volumes that we’re actually seeing across all of our strategies have increased quite significantly. And when I say volumes, what I mean is origination opportunities, activity of deals, and people looking for credit. And as a result, the opportunity set for our managers to continue to grow their businesses and deploy our capital.
Within that context, there are kind of two things I can say. Number one is that the quality of the deal flow across all of our managers has been fantastic. And number two, the terms and conditions that they’re deploying the capital are also fantastic. And that’s then translating into really nice spreads in economics. As a result of that, from a top-line perspective, the yield performance of our managers and returns that they’re actually earning in the quarter on the whole kind of aggregate to returns that are above our net target returns, which are really pleasing.
Now, the other side of the equation that goes to really nice growth and really nice margins is what’s happening with asset quality because what you don’t want is for that to translate to negative performance from losses. And the good news there is the quality of the portfolios of our underlying managers have been fantastic. They’ve been pristine for the most part. So, all of that yield is actually transferring straight through to the return profile that actually comes back to you as our investors in the fund.
In summary, fund performance has been very strong. It’s been above target. And the outlook that we actually have for the fund as we go forward into the coming quarters, we still expect to see really strong origination activity as companies become more confident. And actually, we’re seeing continuing bank withdrawal from the market because of increased regulation. We see the economy, whether it’s a soft or hard landing, we’re kind of agnostic to that because we’re still seeing very high-quality defaults with really good pricing, with really good protections, with really good line of sight of the cash flow profile. And therefore, we feel really confident about how the asset quality of the book will look as well as the asset quality that will flow from the new originations that we actually settle. So, on the whole, very positive environment going forward, and we would expect to remain at the levels that we see today in terms of our performance above target.
