The world of wealth management is in a quandary. It is a tightrope walk of dwindling yields and trying to wage the battle against inflation, and one that can potentially balloon as economies around the world loosen purse strings to boost consumption. Where can an asset manager find the island to hold out above the deluge in such a scenario? 

Investment managers across the world are building in sophisticated matrices to address this paradox. The growing appetite for Alternative Fixed Income strategies and their exotic allure is another way fund managers worldwide are innovating aggressively to find decent returns to their investments. 

With the global economy slowly recovering and businesses starting to operate optimally again, the Alternative Fixed Income straddling private credit industry with a total capital of $1.5 trillion in cash will have a vital and significant role in steering and aiding this recovery process. 

Small and medium enterprises (SMEs), particularly those based in developing countries, are poised as significant beneficiaries of the funding offered by these private credit firms. This is attributed to their being heavily affected during the pandemic and representing over 90% of the businesses internationally. 

Private credit has been recognized as an alternative asset class, which could be included in strategic portfolio diversification and delivers consistent and premium returns and stable incomes. This sector had also started to expand since the 2008 global financial crisis when the investors began lending directly to firms requiring funds, bypassing traditional financial institutions. Its role has become more pronounced in the wake of the global economic disruptions triggered by the coronavirus pandemic. 

The private credit industry turned out to be one of the few industries that held its fort and proved resilient. Major private credit firms were quick to react to the economic crisis. They responded swiftly and decisively by supporting borrowers and providing them with creative and flexible modes of financing. Sensing an opportunity to capitalize on the sell-offs of other major lenders, private credit firms with flexible capital took advantage. They targeted and lent support to SMEs worldwide with relief provided via covenant waivers and amendments. 

The current global economic scenario has also shifted the focus from major players to the performance and manager selectivity within the industry. It started the year with a strong 3.24% first-quarter gain, bringing the returns to about 14.4%, a complete turnaround from the previous year’s 6.8% loss. 

As the pandemic began showing signs of easing, a shift emerged toward larger funds within the industry with established players who could invest more. These deals were driven by a large amount of capital inflow to the industry, which, in turn, led to huge profits utilizing access to better quality instruments and also the ability to invest across the capital structure. 

The global economic market is also expected to move from large underwriting toward club deals. The private credit market is expected to step up and participate in companies’ transactions and economic activities as they inch toward normalcy from their pandemic-driven high debts and lower profits. 

Private credit firms are expected to play a role in this scenario through club deals with these companies. Secondly, a lender-friendly market is expected to emerge globally, with private credit players wielding more power in negotiating and also vis-à-vis the deal’s legal documentation. 

Given that pandemic-hit industries such as travel, leisure, and hospitality are expected to recover within the next two years, private credit firms could invest in sectors such as IT, finance, and food, which actually benefitted from the pandemic. Thus, this current economic situation has presented the private credit industry with a golden opportunity to position itself as a strong and reliable partner for long-term economic growth.