- One of the most popular alternative investing strategies over the last five years has been private debt, thanks to low interest rates and banks stepping back due to more onerous regulations.
- JPMorgan global market strategist David Lebovitz said the number of managers running a private debt fund has more than doubled compared to five years ago, to more than 1,800.
- The impact of coronavirus on some companies that received loans from private-debt managers may be severe, warns Anton Pil, JPMorgan’s managing director of global alternatives, and could force them to take over properties and other assets.
- “If you never managed a building before, you should probably be prepared to take possession,” Pil warned money managers new to the lending game.
- Pensions like Illinois teachers’ fund and Indiana’s state workers’ retirement fund put hundreds of millions to work in these types of strategies last year.
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Hedge funds and other alternative investment managers dove into the private-debt space in the last five years, thanks to low interest rates and regulations put on banks following the financial crisis.
According to JPMorgan, the number of managers with a private-debt fund has more than doubled over the last five years, with more than 1,800 active today.
These strategies act similar to banks, lending money to companies in the form of bonds or loans for a set period of time. It’s been increasingly viewed as a safe bet that’s capable of putting up annual returns above public debt options like Treasuries, with pensions like Illinois teachers’ fund and Indiana’s state workers’ retirement fund putting hundreds of millions to work in these types of strategies last year.
These money managers are about to have their first big test, however, thanks to the growing coronavirus outbreak that has whiplashed markets and shut down parts of the global economy, Anton Pil, JPMorgan’s managing director of global alternatives, said last week.
“Will companies that are highly leveraged have enough cash flow to pay their debt?” he said. If not, money managers new to the lending business could wind up having to take possession of assets the companies borrowed against.
“If you never managed a building before, you should probably be prepared to take possession,” said Pil, who runs the $146 billion unit of JPMorgan Asset Management.
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JPMorgan has also been pushing more into private credit
David Lebovitz, a global market strategist for JPMorgan, said the recent growth in the private-debt space could lead to “first-time players who have been in a risk-off environment and now have to take possession of assets.”
Pil isn’t the only one keeping an eye on companies’ cash situations. Billionaire Bridgewater founder Ray Dalio wrote in a LinkedIn post last Tuesday that the coronavirus is an event that “annihilates” those underestimating its potency.
Dalio believes the virus has made companies with solid cash flows more attractive “as many market players have been shaken out.”
JPMorgan itself has expanded into private credit recently, appointing the asset management unit’s CFO Meg McClellan to be the firm’s first head of private credit, and closed a fund, the Lynstone Global Special Situations fund, in October with more than $1 billion in assets.
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