Private credit investors have become increasingly discerning about dispersion in investment marks, creating a “confidence gap” between asset managers, according to Pacific Investment Management Co.
Managers with stronger loan quality are being rewarded as net asset values are driven more and more by individual firms’ assumptions, PIMCO strategist Lotfi Karoui wrote in a note this week posted on the firm’s website.
Instead of applying a discount to the industry generally, the market is “differentiating more sharply across managers, asset quality, and confidence in reported marks,” he said.
The comments come as regulators intensify their scrutiny of valuation discrepancies in the $1.8 trillion private credit market. Jay Clayton, in his role as US attorney for the Southern District of New York, has expressed concern about how Wall Street firms value private assets, which don’t typically change hands regularly.
Meanwhile, some of the largest private credit firms, including Apollo Global Management Inc., Ares Management Corp., BlackRock Inc. and Blackstone Inc. are continuing to grapple with elevated withdrawal requests in the second quarter.
Karoui said redemption pressure can intensify as investor confidence in valuations erodes, which could force funds to sell their better, more liquid assets. Continued outflows could eventually see valuations reflect what investors are actually willing to pay, either through markdowns, secondary-market discounts or realized losses, he said.
Still, asset sales have been relatively few and far between this year. Pimco President Christian Stracke said in March that private loans for sale are “not clearing at a price yet where we would be interested in buying them.”
Non-traded BDCs will also need to adjust valuations if borrowers can’t keep paying interest and principal on their loans, creating a more real-time pricing dynamic than when real estate vehicles came under pressure a few years ago.
“That puts greater weight on realized asset performance – and ultimately portfolio quality – from here,” Karoui wrote.
Written by: Hannah Webster @Bloomberg
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