Private credit has earned a permanent place in investors’ portfolios, according to KKR’s co-head of credit and markets Christopher Sheldon.

Following a strong two years for the private credit market, Sheldon believes investors and borrowers have a new appreciation for how beneficial and resilient private credit can be. This has led to an acceptance of private credit as a mainstay in investors’ asset allocations.

“In 2022, private credit investments offered high income, low defaults and less volatility. That compared favourably to public markets, which also offered high income and low defaults but came with higher volatility,” Sheldon noted in KKR’s latest market review.

He believes we have entered a golden age for credit allocation, which in part can be attributed to the “tremendous growth” in private credit over the past decade. This has created a diverse range of options for investors today.

“We think direct lending will remain an important part of the borrower’s toolkit, offering increased flexibility and certainty compared to syndicated markets. It will remain an important part of the financing toolkit,” Sheldon explained.

“Private lenders should benefit from overall growth in the market due to increased transaction activity, and we are optimistic for a strong vintage in 2024 and 2025.”

Sheldon also points to the potential for a “mutually beneficial coexistence between liquid and private markets”, which he says is already evident in junior debt markets.

Liquid credit still attractive

Following a strong 2023 for liquid credit markets, Sheldon believes there are still attractive returns potentially available.

“Though some may feel that the best days have passed, we still believe that the liquid market is attractive for investors who wish to deploy quickly and gain access to high levels of current income with what we feel are limited risks of outright losses,” he added.

However, Sheldon noted that “agility and idiosyncratic credit-picking” will prove paramount as dispersion increases.

Outlook for defaults

While investors may be feeling nervous about putting money to work if corporate margins begin to deteriorate, Sheldon expects defaults will increase but acknowledges that this can also create opportunities.

“Our view remains that the [US] economy is slowing, defaults will rise but not skyrocket and dispersion will increase, creating opportunities for credit selection,” he noted.

KKR expects levels of defaults to vary significantly across sectors and regions, concentrating in some pockets of the market more than others.

KKR has been adding to high yield over the past few months. It has also increased exposure to collateralised loan obligation (CLO) debt in order to pick up incremental income and offset any pressure to get the timing right on interest rate cuts.

Don’t miss the opportunity

Sheldon concluded by urging investors to resist the urge to get too granular when it comes to deciding when to invest in credit.

“It’s possible to obsess over entry points, interest rate moves (particularly with rates as high as they are), and the likely path of the economy to the point of foregoing the opportunity to get money deployed,” he said.

“With interest rates likely to remain elevated for the foreseeable future, it is still a good time to be a credit investor.”