Spotlight on David Ross, Managing Director and Head of Private Credit, Northleaf Capital
Global Thought Leader Spotlight
David Ross, Managing Director and Head of Private Credit, Northleaf Capital
I lead the direction and development of Northleaf’s global private credit strategies and serve on the Executive Committee overseeing our broader private markets platform.
Due to a confluence of macroeconomic risks, we are seeing continued dislocation in public markets and tighter liquidity. This has created an attractive market dynamic for private credit investing.
Three key themes to address:
Expect further volatility: The investing environment for private credit has shifted from a period characterized by cheap money, abundant liquidity, and low loss rates to one with higher interest rates, scarce liquidity, and potentially elevated losses. In the short-term, investors should be prepared for more volatility/noise, though great companies are expected to emerge on solid footing.
Liquidity will remain scarce: Scarce liquidity in the market will be a key theme for 2023. Continued volatility in the public markets has significantly reduced new issuance of broadly syndicated loans and high yield bonds and we have seen banks retrench further in the wake of recent financial market turbulence. Private credit lenders have an opportunity to provide attractively priced credit solutions with strong collateral protections, though lenders will need to remain selective.
Low correlation assets: When risk is high, corporate borrowers are generally more exposed to market and macro factors. One area we find especially attractive in today’s environment is asset-based specialty finance. This covers a broad range of private lending, but at the core, it’s investing in highly diversified pools of financial assets that exhibit lower correlation to market and macro factors, and also offer attractive cash yield with strong lender protections. We are particularly focused on esoteric or niche assets such as music royalties, niche factoring platforms, medical liens, litigation finance and portfolio NAV lending, areas that are underserved by traditional capital sources because specialisation is required.
What this means for institutional investors in order to mitigate the identified risks:
Maintain a stable allocation to private credit within a traditional fixed income portfolio: Private credit is a mature asset class with proven performance through multiple cycles. Investors that are truly successful in private credit keep permanent allocations and accordion those allocations up when market dynamics are favourable. In particular, during periods of higher macro risk, private credit offers strong structural protections that have historically maintained low loss rates and stable cash yields for the asset class.
Seek managers that have the ability to tilt towards strong relative value across assets and geographies: Today we are seeing the strongest relative value within North American senior lending and asset-based specialty finance in North America and Australia. Investors may consider orienting to strategies and portfolios that can opportunistically tilt toward segments with the highest relative value.
Risk is higher; differentiated risk management processes should be a focal point of manager selection: In the current environment, every portfolio will encounter situations of company underperformance; how well these situations are managed will bifurcate manager performance. Defaults and losses could rise across the market and managers should be able to demonstrate proven processes around asset and portfolio level risk management, a proactive approach to the portfolio watch-list, and internal workout capabilities honed through prior cycles.
Today’s private credit investing environment offers very attractive absolute and risk-adjusted returns. We believe higher yields will more than offset the potential for higher losses.
David will discuss the evolution of the private credit asset class, from an extension of the private equity asset class to an established and growing asset class within fixed income, and the key factors to achieve long term performance outcomes, at Global Investment Institute’s upcoming Private Credit Roundtable, taking place on Thursday, 4 May 2023 at The Residence - Grand Hyatt Melbourne, Victoria.
To register your interest in attending, click here or for more information email zlatan.kapetanovic@globalii.com.au.
David Ross, Managing Director and Head of Private Credit, Northleaf Capital
David Ross is the Head of the Private Credit Team at Northleaf.
Prior to joining Northleaf in 2016, David was at Bain Capital Credit as a Managing Director, Global Head of Sourcing and a member of Bain Capital’s Opportunistic Credit and Private Credit team. Previously, David served as the Co-Head of Bain Capital’s London office from 2009 to 2013. David began his career with Credit Suisse First Boston in Investment Banking.
David received a B.A. from Harvard College.
If you have enjoyed reading this article, please subscribe to GII Insights, delivered monthly, direct to your inbox and it is FREE!
Disclaimer
The views expressed in this publication are solely those of the individual and do not reflect those of their employer organisation.
All information contained within this publication is general advice only, as the knowledge levels and needs of all individual and corporate investors vary greatly this publication should not be used solely as a decision-making tool, further opinions and information should be sought before making an investment decision. It is the recommendation of Global Investment Institute (GII) that you seek the opinions of a fee-for-service, independent investment adviser before making any investment decision.
The authors, directors or guest writers may have a financial interest as investors, trustees or directors in investments discussed or recommended in this document. It has been assessed by the editors that these financial interests have not had an impact on the material contained here within.
All material appearing in GII’s Global Investment Insights is copyright, reproduction in whole or part is not permitted without written permission from the Publisher, GII.